-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sx8XJ2+aGLgD2HAGFJjQGjDqEg28nVGQJDUEevlTzBW+PY6RqeWRyvNIuxJxAtRF 2drgP6pvElr7gTE29D4v5g== 0000950117-96-000085.txt : 19960209 0000950117-96-000085.hdr.sgml : 19960209 ACCESSION NUMBER: 0000950117-96-000085 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19960208 SROS: BSE SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTV INC /DE/ CENTRAL INDEX KEY: 0000854152 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 942907258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-63879 FILM NUMBER: 96513155 BUSINESS ADDRESS: STREET 1: 1270 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2122622571 MAIL ADDRESS: STREET 2: 12270 AVE OF THE AMERICAS #2401 CITY: NEW YORK STATE: NY ZIP: 10020 S-1/A 1 ACTV, INC. S-1, AM#2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 1996 Registration Statement No. 33-63879 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- ACTV, INC. (Exact name of Registrant as specified in its charter) DELAWARE 4894 94-2907258 - -------------------------------------------------------------------------------- (State or other (Primary Standard (IRS Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code) organization) 1270 Avenue of the Americas New York, New York 10020 (212) 262-2570 --------------------- (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) WILLIAM C. SAMUELS President ACTV, INC. 1270 Avenue of the Americas New York, New York 10020 (212) 262-2570 (Name, address, including zip code and telephone number, including area code, of agent for service) --------------------- Copies To: JAY M. KAPLOWITZ, ESQ. Gersten, Savage, Kaplowitz & Curtin, LLP 575 Lexington Avenue New York, New York 10022 (212) 752-9700 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement and from time to time. --------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier, effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box [ ] This Registration Statement also constitutes Post-Effective Amendment No. 2 to ACTV, Inc.'s Registration Statement on Form S-1 (File No. 33-86540) and Post-Effective Amendment No. 5 to ACTV, Inc.'s Registration Statement on Form S-1 (File No. 33-61320). * The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (ii) CALCULATION OF REGISTRATION FEE
==================================================================================================================================== Title of Amount Being Proposed Maximum Proposed Amount of Securities To Registered(1) Offering Price Per Maximum Registration Be Registered Security(2) Aggregate Fee Offering Price - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.10 per share 2,500,000 $4.50 $11,250,000 $3,879.31 Common Stock, par value $.10 per share 3,850,000 $3.53 $13,590,500 $4,686.38 ==================================================================================================================================== Total Registration $8,565.69(3)(4) Fee ====================================================================================================================================
(1) Pursuant to Rule 416, the Registration Statement also relates to an indeterminate number of additional shares of Common Stock issuable upon the exercise of options, warrants and SARs pursuant to anti-dilution provisions contained therein, which shares of Common Stock are registered hereunder. (2) Pursuant to Rule 457, estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices of the Registrant's Common Stock as quoted by the National Association of Securities Dealers Automated Quotation System on October 30, 1995. (3) In accordance with Rule 429 under the Securities Act of 1933, the Prospectus included herein is a combined prospectus which also relates to ACTV's Registration Statement on Form S-1, File No. 33-86540 (the "1995 Registration Statement"), and ACTV's Registration Statement on Form S-1, File No. 33-61320 (the "1994 Registration Statement"). This Registration Statement, which is a new registration statement, also constitutes Post-Effective Amendment No. 2 to the 1995 Registration Statement and Post-Effective Amendment No. 5 to the 1994 Registration Statement. The amount of securities eligible to be sold under the 1995 Registration Statement ($121.23 as of November 1, 1995) and the amount of securities eligible to be sold under the 1994 Registration Statement ($5,379.73 as of November 1, 1995) shall be carried forward to this Registration Statement and the total registration fee is adjusted accordingly. Such Post-Effective Amendment No. 2 to the 1995 Registration Statement and Post-Effective Amendment No. 5 to the 1994 Registration Statement shall hereafter become effective upon the effectiveness of this Registration Statement in accordance with Section 8(a) of the Securities Act of 1933. (4) Registrant paid $2,228.52 upon the initial filing of this Registration Statement, and, therefore, an additional fee of $836.21 is due. (iii) ACTV, INC. FORM S-1 CROSS REFERENCE SHEET
Caption or Item Number Heading in Prospectus - ----------- --------------------- 1. Forepart of the Registra- Cover page of Registration Statement; tion Statement and Outside and Outside Front Cover Page of Front Cover Page of Prospectus. Prospectus 2. Inside Front and Outside Inside Front and Outside Back Cover Back Cover Pages of Pages of Prospectus; and Additional Prospectus Information. 3. Summary Information, Risk Prospectus Summary; and Risk Factors. Factors and Ratio of Earnings to Fixed Charges 4. Use of Proceeds Use of Proceeds. 5. Determination of Offering Cover Page; Plan of Distribution. Price 6. Dilution Dilution. 7. Selling Security Holders Selling Security Holders; Plan of Distribution. 8. Plan of Distribution Cover Page; Selling Security Holders; Plan of Distribution. 9. Description of Securities Description of Capital Stock. to be Registered 10. Interests of Named Experts Principal Stockholders; Experts; and Counsel Management; and Certain Transactions; and Legal Matters.
(iv) 11. Information with Respect to Cover Page; Prospectus Summary; The Company; Registrant Dividend Policy; Certain Market Information; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders and Financial Statements. 12. Disclosure of Commission's Not Applicable. Position on Indemnification for Securities Act Liabilities
(v) PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED , 1996 PROSPECTUS ACTV, INC. 2,500,000 Shares of Common Stock Offered by the Company 3,850,000 Shares of Common Stock (1) 122,855 Shares Issuable by the Company Upon the Exercise of Options, Warrants, Pursuant to SARs, or to Others (2) 3,727,145 Shares Offered by Selling Security Holders This Prospectus relates to the offer by ACTV, Inc. (the "Company") of up to 2,500,000 shares of the Company's common stock, $.10 par value (the "Common Stock"), to be offered for sale by the Company to institutional investors and certain accredited individuals and organizations, at a price of $4.50 per share (the "Company Shares"). See "PLAN OF DISTRIBUTION." This Prospectus also relates to up to 3,850,000 shares of Common Stock (the "Security Holders' Shares"). Up to 122,855 of such shares may be issued by the Company upon the exercise of options, warrants or pursuant to SARs that are currently outstanding and are not exercisable for a period of six months. Up to 3,727,145 of such shares may be sold by security holders (the "Selling Security Holders") who have acquired or will acquire such shares from the Company (i) upon the exercise of currently exercisable options and warrants, and pursuant to SARs, (ii) upon issuance to consultants pursuant to existing agreements and (iii) upon issuance in connection with certain financings. The Company will not receive any of the proceeds from sales of Selling Security Holders' Shares, but will receive the exercise price upon the exercise of the options or warrants described above. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." This Prospectus is a combined prospectus which also relates to ACTV's Registration Statement on Form S-1, File No. 33-86540 (the "1995 Registration Statement"), and ACTV's Registration Statement on Form S-1, File No. 33-61320 (the "1994 Registration Statement"). The Registration Statement, which this Prospectus is a part of, is a new registration statement and also constitutes Post-Effective Amendment No. 2 to the 1995 Registration Statement and Post- Effective Amendment No. 5 to the 1994 Registration Statement. The Company's Common Stock is traded on the over-the-counter market on the NASDAQ SmallCap Market ("NASDAQ") and on the Boston Stock Exchange ("BSE"). On February 5, 1996, the closing bid and asked quotations for the Common Stock as reported by NASDAQ were $4 3/4 and $4 7/8 per share. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Date of this Prospectus is ________ , 1996 The Security Holders' Shares that may be offered from time to time by Selling Security Holders may be sold through ordinary brokerage transactions in the over-the-counter market or on the Boston Stock Exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. The Selling Security Holders each may be deemed to be "an underwriter", as defined in the Securities Act of 1933 (the "Securities Act"). If any broker-dealers are used by the Selling Security Holders, any commissions paid to broker-dealers and, if broker-dealers purchase any shares of Common Stock as principals, any profits received by such broker-dealers on the resales of the shares of Common Stock may be deemed to be underwriting discounts or commissions under the Securities Act. In addition, any profits realized by the Selling Security Holders may be deemed to be underwriting commissions. All costs, expenses and fees in connection with the registration of the securities offered by the Selling Security Holders will be borne by the Company. All brokerage commissions, if any, attributable to the sale of the securities offered by the Selling Security Holders will be borne by the Selling Security Holders. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus in connection with the offer contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Under the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations thereunder, any person engaged in a distribution of the securities offered by this Prospectus may not simultaneously engage in market-making activities with respect to shares of the Common Stock during the applicable "cooling off" period (two or nine days) prior to the commencement of such distribution. In addition, and without limiting the foregoing, the Selling Security Holders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Rule 10b-5, in connection with transactions in the securities, which provisions may limit the timing of purchases and sales of the securities by the Selling Security Holders. 2 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission ("Commission") a registration statement (as amended, the "Registration Statement") under the Securities Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, which may be inspected without charge at the principal office of the Commission, 450 Fifth Street, NW, Washington, DC, 20549, and copies of the material contained therein may be obtained from the Commission upon payment of applicable copying charges. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the reporting and other informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements, and other information with the Commission. Such reports, proxy statements, and other information can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511, and at 7 World Trade Center, New York, New York, 10048. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, at prescribed rates. The Company's Common Stock is listed on NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108, and the Company's periodic reports, proxy statements, and other information can be inspected at NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements with notes thereto appearing elsewhere in this Prospectus. THE COMPANY General ACTV, Inc. ("ACTV" or the "Company") has developed proprietary Programming Technologies (the "Programming Technology") that individualize television programming. ACTV's Programming Technology permits the delivery of individualized television, which, in the Company's view, significantly enhances the quality of most genres of television programming. ACTV's Programming Technology provides instant and seamless changes in the live or prerecorded video picture and/or audio and/or graphics in response to the various selections supplied by each viewer. A specially produced ACTV program (the "ACTV Program" or "ACTV Programming") is like a linear TV program, except that it appears to be individualized for each viewer. (Linear programs are standard television programs that can be viewed only as created and do not offer the viewer the option to make choices as to the content of the program or to respond to the contents of the program in an individualized way.) There is no limit to the number of viewers who can interact simultaneously with an ACTV Program. ACTV's individualized programming is designed to work with both single and multiple channels of 6MHz band-width and with different modes of transmission: cable, direct broadcast satellite ("DBS"), multi-microwave distribution systems ("MMDS"), broadcast systems, distance learning networks and closed circuit televisions systems. It is compatible with commonly available one-way analog systems as well as the newer digital systems that have recently begun to be deployed. ACTV's strategy is to generate revenues from the sale of ACTV Programming that it either owns, has licensed or that has been created by a third party under a license from ACTV, including fees paid by subscribers to premium cable networks in which the Company has an ownership interest. The Company's mission is to improve the quality of entertainment and education television programming. The Company also believes that the Programming Technology can enhance the quality of television advertising by enabling the advertiser to customize each commercial for various audience segments. It is the Company's objective to seek advertiser support for its individualized home entertainment networks. The chief markets presently targeted by the Company for the ACTV Programming Technology are in-home entertainment, education (with an emphasis on distance learning), site-based entertainment and internet applications. The Company seeks to exploit these markets, principally in the U.S., through licensing the Programming Technology, by creating joint venture relationships, and by direct sales. 4 The Company has eight subsidiaries, which include a national entertainment company, a national education company, a three-dimensional company, and five regional television networks; ACTV Entertainment Inc., a New York corporation ("ACTV Entertainment") incorporated on March 9, 1988, ACTV Interactive, Inc., a Delaware corporation incorporated on July 8, 1992, 3D Virtual, Inc., a Delaware corporation incorporated on July 20, 1995, The Los Angeles Individualized Television Network, Inc., a Delaware corporation incorporated on March 7, 1995, The San Francisco Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, The Chicago Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, The New York Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, and The Atlanta Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995. Unless otherwise indicated, all references in this Prospectus to the Company or ACTV include ACTV and its eight subsidiaries. ACTV was incorporated under the laws of the State of Delaware on July 24, 1989. The Company is the successor, by merger effective November 1, 1989, to ACTV, Inc., a California corporation, organized on July 11, 1983. The Company's executive offices are located at 1270 Avenue of the Americas, New York, New York, 10020, telephone number (212) 262-2570. 5 THE OFFERING Securities Offered Company Shares ................... 2,500,000 shares of Common Stock. See "PLAN OF DISTRIBUTION - Company Shares." Security Holders' Shares .................. 3,850,000 shares of Common Stock. Up to 122,855 of such shares may be issued by the Company upon the exercise of options, warrants or pursuant to SARs that are currently outstanding and are not exercisable for a period of six months. Up to 3,727,145 of such shares may be sold by Selling Security Holders who have acquired or will acquire such shares from the Company (i) upon the exercise of currently exercisable options and warrants, and pursuant to SARs, (ii) upon issuance to consultants pursuant to existing agreements, and (iii) upon issuance in connection with certain financings. The Company will receive the net proceeds of the sale of the Company Shares. It will not receive any proceeds from sales of Security Holders' Shares, but will receive the proceeds of the exercise of any options or warrants exercised by the Selling Security Holders. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." The exercise prices of the shares of Common Stock issuable upon the exercise of options and warrants, and the number of shares issuable, may be subject to adjustment in the event of a merger, stock split, stock dividend and similar transactions. See "MANAGEMENT - Stock Options and Stock Appreciation Rights" and "DESCRIPTION OF CAPITAL STOCK." Common Stock Outstanding At the Date of this Prospectus(1)................... 11,414,211 Shares After the Offering(1)(2).......... 15,075,784 Shares Common Stock Symbols................ NASDAQ: IATV BSE: IAT 6 Use of Proceeds..................... The net proceeds of the sale of the Company Shares and any proceeds from the exercise of options or warrants underlying Security Holders' Shares being registered hereunder will be applied to working capital, which may include research and development. A portion of the proceeds may be utilized to repurchase shares of Common Stock. The Company will not receive any proceeds from the sales of the Security Holders' Shares. See "USE OF PROCEEDS." Risk Factors........................ An investment in the Company's Common Stock involves a high degree of risk and should be made only after a careful consideration of the significant risk factors that may affect the Company. Such risks include special risks concerning the Company and its business, including among other risks, Operating Losses to Date, Possible Need for Additional Financing and Dilution. See "RISK FACTORS." - ------------ (1) Does not include (a) 80,000 shares of Common Stock issuable pursuant to options being offered pursuant to a separate Prospectus (the "Concurrent Prospectus"). See "CONCURRENT OFFERING." (2) Assumes the issuance of all the 2,500,000 Company Shares and the 1,161,573 unissued Security Holders' Shares being offered hereby, including those underlying options and warrants. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." 7 SUMMARY FINANCIAL DATA (in dollars, except number of shares)
Nine Months Years Ended December 31, Ended September 30, -------------------------------------------------------------------- ------------------------ 1990 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- Statement of Operations: Revenues $ 615,011 $ 1,018,074 532,596(1) $ 164,602(1) $ 938,416 $ 768,739 $ 1,075,925 Operating Expenses 4,462,771 4,435,322 2,798,847(1) 3,443,513(1) 5,734,132 4,415,721 6,816,816 Equity in Net Loss of ACTV Interactive (2) -- -- 187,781 506,303 143,500 143,500 -- Loss Before Extraordinary Item (3) 3,093,512 3,313,998 2,778,085 4,156,955 5,122,010 3,929,357 5,751,337 Net Loss (3) 3,093,512 3,313,998 2,778,085 4,156,955 4,465,240 3,407,554 5,657,220 Weighted Average Shares Outstanding 3,727,255 4,043,867 4,665,686 5,800,134 7,897,278 7,699,790 9,748,209 Loss Per Common Share Before Extraordinary Item (3) 0.83 0.82 0.59 0.72 0.65 0.51 0.59 Net Loss Per Common Share (3) 0.83 0.82 0.59 0.72 0.57 0.44 0.58 Balance Sheet Data: 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 9/30/94 9/30/95 -------- -------- -------- -------- -------- ------- ------- Working Capital 2,397,952 128,834 (104,486) 2,263,225 1,503,703 (704,003) 3,458,531 Total Assets 6,211,803 2,828,119 3,146,503 5,920,720 7,733,314 6,129,878 10,454,934 Long Term Obligations 649,796 669,796 1,792,794 2,220,794 2,325,061 2,443,866 222,219 Stockholders' Equity (4) 5,089,036 1,775,038 1,006,314 1,910,603 3,972,543 1,956,892 8,009,212 Total Capitalization 5,738,832 2,444,834 2,799,108 4,131,397 6,297,604 4,400,758 8,231,431
(1) For the period between July 15, 1992, and March 11, 1994, all education sales and expenses were reported separately by the Company's 49% affiliate, ACTV Interactive, and were not consolidated with the Company's statements of operations. For the remainder of 1994, operational results related to education were included with those of the Company, as a result of the Company's March 11, 1994 purchase of the Post Company's 51% interest in ACTV Interactive. (2) The results of ACTV Interactive are accounted for under the equity method of accounting for the years 1992 and 1993 and for the period January 1, 1994 to March 11, 1994. (3) Includes for the year ended 12/31/94 and nine months ended 9/30/94 extraordinary gains of $656,770, ($.08 per share) and $521,803 ($.07 per share), respectively, related to the extinguishment of debt and equipment lease obligations. Includes for the nine months ended 9/30/95 an extraordinary gain of $94,117 ($.01 per share) related to the extinguishment of debt obligations. (4) No cash or non-cash dividends have been paid or granted and the Company does not anticipate the declaration or payment of dividends in the foreseeable future. 8 RISK FACTORS THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. 1. Operating Losses to Date. The Company has operated at a loss through the date of this Prospectus. The Company's net losses for the nine months ended September 30, 1995 and 1994 (the "September 1995 period" and the "September 1994 period," respectively) were $5,657,220 and $3,407,554, respectively. The September 1995 Period includes an extraordinary gain of $94,117 while the September 1994 period includes an extraordinary gain of $521,803. The Company had net losses of $4,465,240 in the fiscal year ended December 31, 1994 ("Fiscal 1994"), $4,156,955 in the fiscal year ended December 31, 1993 ("Fiscal 1993"), and $2,778,085 in the fiscal year ended December 31, 1992 ("Fiscal 1992"). Through September 30, 1995, the Company had an accumulated deficit of approximately $29.2 million. To date, the Company has had limited revenues, including revenues of $1,075,925 in the September 1995 period, $938,416 in Fiscal 1994, $164,602 in Fiscal 1993, and $532,596 in Fiscal 1992. The increase in revenues in Fiscal 1994 was partially the result of the Company's including for the period March 11 to December 31 of Fiscal 1994 all education sales, which were reported for Fiscal 1993 by ACTV Interactive, a partnership in which ACTV held a 49% interest from July 14, 1992 to March 11, 1994. ACTV Interactive's gross sales were $839,165 in Fiscal 1993, compared with $348,473 for the period from July 14, 1992, the partnership formation date, to December 31, 1992. ACTV Interactive's results were accounted for under the equity method of accounting. There can be no assurance that the Company will generate significant revenues or achieve profitability in the future. 2. Unproven Business Strategy. Other than the activities of ACTV Interactive, the Company's prior activities in the education market and the arrangement with LGV in the entertainment market, the Company has not had significant sales of the Programming Technology. While ACTV has recently consummated its first sale of the new distance learning technology, there can be no assurance that the results of this project will support the continuation of the project or lead to other sales. Also, while the Company has recently entered into agreements with a large regional cable sports network, a national news service, and a cable operator to create a trial for Los Angeles-based programming service, which was launched in mid-1995, there can be no assurance that these agreements will result in the development of a commercially successful programming service. In addition, the Company is dependent on co- ventures or licenses with third parties to produce ACTV Programs and the Company will be required to demonstrate a market for such programs. There can be no assurance that co- venturers or licensees, or ACTV's direct sales force will succeed in marketing the ACTV Programs. See "BUSINESS - Entertainment." 9 Furthermore, the likelihood of the success of the Company must be considered in light of the problems, costs, difficulties and delays encountered in connection with the operation of a business, the operations of which consist of the development and commercialization of new and unproven technologies, and the competitive environment in which the Company operates. Accordingly, there can be no assurance that the Company will successfully market the Programming Technology or operate on a profitable basis. See "BUSINESS." 3. Possible Need for Additional Financing. To date, the Company's capital requirements to develop the Programming Technology, produce ACTV Programming, develop marketing approaches and strategic alliances, and to cover costs of selling and general and administrative expenses, have been significant, resulting in an accumulated deficit as of September 30, 1995 of approximately $29.2 million. Although the Company will receive none of the proceeds from the sale of the Selling Security Holders' Shares offered hereby, the Company could receive proceeds of up to $10,125,000 if all the Company Shares are sold (assuming a sale price of $4.50 per share and the payment of commissions and other expenses of approximately $1,125,000) as well as up to approximately $3.0 million additional proceeds if the options and warrants underlying the Selling Security Holders' Shares are exercised. However, there can be no assurance that any of the Company Shares will be sold or that the options or warrants underlying the Selling Security Holders' Shares will be exercised, that the expenses of the offering will not exceed those anticipated, or that this offering will result in any proceeds to the Company. Management believes its current funds will enable the Company to finance its operations for the next twelve month period. However, if the Company's assumptions and beliefs prove to be incorrect, the Company may require additional financing during this period. In the event that the Company does require additional financing, the Company has no agreements, arrangements or understandings to obtain such additional financing. 4. Patents and Proprietary Information. The Company has obtained patents covering certain aspects of the Programming Technology and has patents pending with respect to other developments or enhancements thereof. However, there can be no assurance (i) that patents applied for will be granted, (ii) that the patents the Company owns or has rights to or that may be granted or obtained by the Company in the future will be enforceable or will provide the Company with meaningful protection from competition, (iii) that any products developed by the Company will not infringe any patent or rights of others, or (iv) that the Company will possess the financial resources necessary to enforce any patent rights which it holds. See "BUSINESS -- Patents, Applications and Proprietary Information." The Company requires each of its employees, consultants and advisors to execute a confidentiality and assignment of proprietary rights agreement upon the commencement of employment or a consulting relationship with the Company. These arrangements generally provide that all inventions, ideas and improvements made or conceived by the individual arising out of the employment or consulting relationship shall be the exclusive property of the Company. This information shall be kept confidential and not disclosed to third parties except by consent of the Company or in other specified circumstances. There can be no assurance, however, that these arrangements will provide effective protection of the Company's proprietary information in the event of unauthorized use or disclosure of such information. 10 5. Technological Obsolescence; Research and Development. The Company is engaged in a field characterized by extensive research efforts and rapid, significant technological change. There can be no assurance that research or development by others will not render the Programming Technology obsolete or that the limited research and development performed by the Company will continue or will be successful. In 1994, outside research and development costs totaled $476,155 and were primarily related to development of a new analog/digital two-way distance learning system. The Company believes that it may be required to expend approximately $200,000 during the first quarter of 1996 to facilitate the completion of current research and development projects, relating primarily to development of the distance learning system. There can be no assurance that the new distance learning system can be deployed on a timely basis, or that once deployed, it will function satisfactorily. If the Company determines that additional research and development is required, there can be no assurance that the Company will have sufficient funds or access to additional funds to engage in substantial additional research and development. See "BUSINESS -- Research and Development." 6. Possible Shortage of Available Channels for In-Home Cable Applications. In order for the ACTV Programming Technology to be delivered over cable, MMDS and DBS systems for the in-home market, it must compete for channel space on cable, MMDS and DBS systems, many of which have limited available channel capacity. Although a simpler form of individualization can be achieved by the Company's using one channel of band-width, the more sophisticated applications of ACTV Programming currently require three to four channels of analog band-width. There is no assurance that cable, MMDS and DBS operators will devote a sufficient number of channels of band-width to the Programming Technology in the future. Nor is there any assurance that the Company will be able to expand, unless cable, MMDS, or DBS operators continue to upgrade and increase their channel capacity by using some form of "compression technology," whereby the digitalization of the information required to produce a television picture reduces the channel capacity required for programming that incorporates the Programming Technology. The compression technologies recently deployed and those currently under development could enable the Company to use the more complex applications of the Programming Technology on one channel of band-width. The Company believes, although there can be no assurance, that the cable, MMDS and DBS industry is, in general, moving in the direction of increasing channel capacity. The costs associated with such compression technology may result in substantial additional costs to cable, MMDS and DBS operators. However, the Company's management cannot currently quantify such additional costs, which may adversely affect the Company's future operations. See "BUSINESS." 7. Dependence Upon Licensees and Joint Venturers. The Company has adopted as a business strategy the exploitation of the Programming Technology through licensing, the arrangement of joint ventures and by means of a direct sales force. While the Company has established a direct sales force of four employees and fifteen distributors, and intends to increase its direct sales forces, the Company will continue to be, in substantial part, dependent upon the ability of its licensees and prospective joint venture partners to offer products and services that are commercially viable. In addition, the Company, its licensees or joint venture partners will need to provide individualized programming to continue commercial cable operations, and they are dependent upon third parties for such programming. The Company will be dependent upon its ability, and that of its licensees and joint venture partners, to actively promote and distribute the Programming Technology and the products. There is no assurance that the Company's 11 marketing strategy will be successful. Further, the Company may be adversely affected by the financial and business considerations of its licensees and joint venture partners. The Company is engaged in an ongoing program designed to evaluate the Programming Technology as applied to the cable television market. The results of such programs cannot yet be determined. No assurance can be given that the results of the evaluation will be positive or that one or more of the markets which the Company is evaluating may prove to be viable for the Programming Technology. There is a possibility that in the structuring of future joint ventures and license agreements that the licensees and joint venture partners may be granted interests in the Company, and or any of its subsidiaries, in the form of equity securities or options to acquire equity securities. See "BUSINESS -- Marketing and Program Production." 8. Dependence upon Suppliers of Programming. The Company is dependent upon the producers of linear programming that can be enhanced using the Programming Technology to create individualized ACTV Programs. To date, the Company has entered into agreements with eight such producers, but there can be no assurance that such agreements will provide the Company with sufficient programming appropriate for enhancement, that the Company will be able to develop additional sources of programming, or that the enhanced programs can be successfully marketed in an individualized format. See "BUSINESS - Marketing and Program Production." 9. Government Regulation. The Company believes that neither its present nor any proposed commercial implementation of the ACTV Programming Technology on cable, DBS or MMDS will require governmental license or approval. Certain broadcast application and copper pairs with ADSL may require governmental approval. No assurance can be given that applicable laws will not change. In the event such approval were to be required, there can be no assurance that the Company would be able to obtain such approval or the licenses required for the further implementation of the ACTV Programming Technology. See "BUSINESS Government Regulation." 10. Dependence Upon Key Personnel. The Company has been largely dependent upon the efforts of William C. Samuels in his roles as Chairman of the Board, President, Chief Executive Officer and Director of the Company, David Reese as Executive Vice President, President of ACTV Entertainment and a Director of the Company, and Bruce Crowley, Executive Vice- President, President of ACTV Interactive, Inc. and a Director of the Company. The Company has entered into five-year employment agreements with Mr. Samuels and Mr. Reese. The Company currently does not maintain "key employee" insurance on the lives of Messrs. Samuels, Reese or Crowley and there can be no assurance that such insurance would be available at an acceptable cost to the Company, should it seek to acquire such insurance in the future. See "MANAGEMENT - Employment and Consulting Agreements." In order to compete in a marketplace with rapidly changing and expanding technology, the Company requires employees not only with extensive management experience, but also with certain technical abilities to direct the Company's continuing research and development efforts. While the Company believes that it currently employs such personnel, and that other persons 12 could be retained in such capacities, there can be no assurance that if the Company were required to replace such personnel, it could readily do so, or that, even if such qualified replacements were retained, the development of the Company's business would not be delayed. See "BUSINESS -- Research and Development." 11. Competition. The Programming Technology competes with many other forms of entertainment, education and information dissemination, many of which are significantly more established, including the standard television industry, the movie industry, cable television, programming services and other forms of entertainment. There can be no assurance that products and services incorporating the Programming Technology will ever be established in the marketplace in a significant enough manner to make the Company profitable. In addition, the Programming Technology may compete with other technologies described as interactive television, some of which may be developed or promoted by companies with resources significantly greater than the Company's. See "BUSINESS -- Competition." 12. Dependence on Equipment Suppliers. The Company does not intend itself to manufacture set-top converters, terminals, video servers, or other interactive devices. Currently, in the entertainment market, the Videoway terminal manufactured through LGV is the only ACTV compatible set-top converter available to potential distributors of ACTV Programming. The Company intends to grant licenses similar to the one granted to LGV to other manufacturers that are selected by the future distributors of ACTV Programming. All of the ACTV classroom and distance learning systems which incorporate the Programming Technology and are sold by ACTV in the education market are manufactured by KDI Precision Products, Inc. ("KDI"). While the Company believes that KDI can produce sufficient systems to meet the anticipated needs of ACTV in the education marketplace, in the event that KDI were unable to supply the systems, there can be no assurance that the Company could produce sufficient systems or obtain sufficient systems from another manufacturer at an acceptable price. The inability of ACTV to obtain systems would have a material adverse effect on the business of the Company. There is no assurance that the Company will be successful in developing additional manufacturing licenses for the entertainment and education markets; the failure of the Company to do so would have a material adverse effect on the business of the Company. See "BUSINESS - Set Top Converters, Terminals and Other Interactive Devices." 13. No Assurance of Public Market for Securities. Although the Company's Common Stock is quoted on NASDAQ and listed on the Boston Stock Exchange, there can be no assurance that the Company will be able to maintain such quotation or listing, or that, if maintained, a significant public market will be sustained. For continued listing on NASDAQ, the Company is required to maintain a minimum stockholders' equity of $1,000,000 and assets of $2,000,000. The Boston Stock Exchange's maintenance criteria require the Company to have total assets of at least $1,000,000 and total stockholders' equity of at least $500,000. At September 30, 1995, the Company had stockholders' equity of $8,009,212 and assets of $10,454,934. The Company has continued to operate at a loss through the date of this Prospectus. In the event the Common Stock were delisted from NASDAQ, trading, if any, would be conducted on the Boston Stock Exchange and in the over-the-counter market on the NASD's 13 electronic bulletin board, in what are commonly referred to as the "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. In addition, the Common Stock would be subject to Rules 15g1-15g6 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, a person with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with his or her spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers in the Offering to sell their securities in the secondary market. The Commission has also recently adopted regulations that define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the regulations require the delivery, prior to the transaction, of a disclosure schedule prepared by the Commission relating to the penny stock market. The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. While many NASDAQ-listed securities are covered by the definition of penny stock, transactions in a NASDAQ-listed security are exempt from all but the sole market-maker provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if the issuer has not been in continuous operation for three years), (ii) transactions in which the customer is an institutional accredited investor, or (iii) transactions that are not recommended by the broker-dealer. In addition, transactions in a NASDAQ security directly with a NASDAQ market-maker for such security are subject only to the sole market-maker disclosure, and the disclosure with respect to commissions to be paid to the broker-dealer and the registered representative. Finally, all NASDAQ securities would be exempt from the recently-adopted regulations regarding penny stocks if NASDAQ raised its requirements for continued listing so that any issuer with less than $2,000,000 in net tangible assets or stockholders' equity would be subject to delisting. These criteria are more stringent than the current NASDAQ maintenance requirements. 14. No Dividends. The Company has not paid any cash dividends on its Common Stock since inception and does not intend to pay cash dividends on its Common Stock for the foreseeable future. Although there are no restrictions on the Company's ability to pay dividends, the Company intends to follow a policy of retaining earnings, if any, to finance the development and expansion of its business. 15. Preferred Stock Authorized. The Company's Board of Directors has the authority, without further action of the stockholders, to issue shares of preferred stock which have 14 conversion, dividend, liquidation and voting rights that could adversely affect holders of Common Stock or could be used to restrict the Company's ability to merge with or sell its assets to a third party, thereby preserving control of the Company by its present owners. Although the Company has no present intention to issue any shares of preferred stock, there can be no assurance that the Company will not do so in the future. 16. Rule 144 Sales. Of the shares of the Company's Common Stock presently outstanding, approximately 3.0 million are "restricted securities" as that term is defined by Rule 144 promulgated under the Securities Act and in the future may be sold only in compliance with Rule 144 or pursuant to registration under the Securities Act or pursuant to another exemption therefrom. For so long as the Registration Statement of which the Concurrent Prospectus is a part is current and effective, the shares owned by the selling security holder thereunder and offered thereby (20,000) and the shares covered by the Concurrent Prospectus that are issuable upon the exercise of options (80,000) may be sold without regard to the volume limitations, described below, set forth in Rule 144. Generally, under Rule 144, each person having held restricted securities for a period of two years may, every three months, sell in ordinary brokerage transactions an amount of shares which does not exceed the greater of one percent (1%) of the Company's then outstanding shares of Common Stock, or the average weekly volume of trading of such shares of Common Stock as reported during the preceding four calendar weeks. A person who has not been an affiliate of the Company for at least the three months immediately proceeding the sale and who has beneficially owned shares of the Common Stock for at least three years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. Of the restricted shares, a substantial number have been held by non-affiliates of the Company for more than three years or have been held by affiliates of the Company for more than two years. Actual sales, or the prospect of sales by the present stockholders of the Company or by future holders of restricted securities under Rule 144, or otherwise, may, in the future, have a depressive effect upon the price of the Company's shares of Common Stock in any market that may develop therefor, and also could render difficult sales of the Company's securities purchased by investors herein. 17. Control by Officers, Directors and Principal Stockholders. The Company's officers and directors own, of record, 289,196 outstanding shares of Common Stock, of which 20,000 are being offered pursuant to the Concurrent Prospectus (not including 80,000 shares, which are being offered pursuant to the Concurrent Prospectus, issuable upon the exercise of options). In addition, William C. Samuels, Chairman, President, Chief Executive Officer and a director of the Company, pursuant to a voting agreement, has voting control of the 2,341,334 shares of Common Stock owned of record by the Post Company. In addition, pursuant to a separate voting agreement, Mr. Samuels has voting control of the shares owned by Dr. Freeman. Consequently, Mr. Samuels has voting control over 3,321,917 shares of Common Stock, or approximately 27.92% of the outstanding shares of Common Stock, assuming issuance of 533,035 shares of Common Stock upon exercise of options. Accordingly, Mr. Samuels could have substantial influence over the affairs of the Company, including the election of directors. 18. Possible Acquisition of Control by The Washington Post Company. Through March 17, 1997 (subject to extension in certain circumstances), the Post Company shall have the right to purchase from the Company, at a price which has not yet been determined, the amount of shares of Common Stock necessary to bring its percentage ownership of the total then 15 outstanding shares of Common Stock to 51%. If the Post Company should choose to exercise its right, the purchase price would be established after arms-length negotiations between the parties. In the event that the parties fail to agree on a purchase price, the parties would seek an outside appraisal. At present, the Company does not have enough shares authorized to accommodate the Post Company should it choose to exercise such right. If the Post Company decides to exercise its right, the Company will seek to take the necessary action to fulfill its obligations. If such right is exercised, the ability, pursuant to agreement, of William C. Samuels, Chairman, President and Chief Executive Officer of the Company, to vote the shares owned of record by the Post Company will terminate, and the Post Company will be able to control the affairs of the Company. 19. Outstanding Options and Warrants. As of the date of this Prospectus, the Company had granted options and warrants to purchase an aggregate of 2,692,082 shares of Common Stock that had not been exercised. Of the shares of Common Stock subject to these unexercised options and warrants, 10,000 may be purchased for less than $1.00; 12,000 may be purchased for between $1.00 and $1.99 per share; 694,082 may be purchased for between $2.00 and $2.99 per share; 1,543,500 may be purchased for between $3.00 and $3.99 per share; 330,000 may be purchased for between $4.00 and $4.99 per share; and 102,500 may be purchased for between $5.00 to $5.99 per share. To the extent that the outstanding stock options and warrants are exercised, dilution to the interests of the Company's stockholders will occur. Moreover, the terms upon which the Company will be able to obtain additional equity capital may be affected adversely, since the holders of the outstanding options and warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the outstanding options and warrants. 20. Possible Volatility of Securities Prices. The market price of the Company's securities may be highly volatile, as has been the case with the securities of other companies engaged in high technology research and development. Factors such as announcements by the Company or its competitors concerning technological innovations, new commercial products or procedures, proposed government regulations and developments or disputes relating to patents or proprietary rights may have a significant impact on the market price of the Company's securities. 16 DILUTION The difference between the offering price to the public per share of the Company Shares and the net tangible book value per share of the Common Stock (assuming no exercise of any options, offered pursuant to the Concurrent Prospectus) after this Offering constitutes the dilution to investors in this Offering. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities), by the number of outstanding shares of Common Stock. As of September 30, 1995, the Company has an aggregate of 11,375,150 shares of Common Stock outstanding and a net tangible book value (exclusive of intangible items of $3,873,305), as reflected on its consolidated balance sheets as of the same date, of $4,135,907, or approximately $.36 per share. All assets are assumed to be tangible assets, other than patents and goodwill. Assuming that purchases of Company Shares in this Offering are made at the offering price of $4.50 per share, purchasers of the shares would suffer an immediate dilution of $3.47 per share. The following table illustrates dilution to such purchasers on a per share basis: Assumed offering price per Company Share................................$ 4.50 Net tangible book value per share before sale of the Company Shares..........................................................$.36 Increase per share attributable to sale of Company Shares on a pro forma basis...........................$.67 ---- Pro forma net tangible book value per share after sale of the Company Shares.................................$ 1.03 ---- Dilution per share to new investors......................................$ 3.47(1) ====
- -------- 1 There is no assurance that all of the Company Shares will be sold. If all of the Company Shares are not sold, dilution to such purchasers on a per share basis will be greater. 17 USE OF PROCEEDS The Company will receive estimated net proceeds of up to $10,125,000 if all the Company Shares are sold, as well as up to approximately $3.1 million additional proceeds if all of the options and warrants for which the underlying Selling Security Holders' Shares being offered hereby are exercised. However, there can be no assurance that all the Company Shares will be sold or that such options or warrants will be exercised. The Company cannot redeem or cancel such options or warrants to encourage their exercise. Such proceeds will be applied to working capital, which may include research and development. A portion of the proceeds may be utilized to repurchase shares of Common Stock at a price to be determined by the Board of Directors. To date, the Company has not adopted any repurchase programs. The foregoing represents the Company's estimate of the allocation of the net proceeds of the offering, based upon the current status of its operations and anticipated business plans. It is possible, however, that the application of funds will differ from the estimates set forth herein due to changes in the Company's planned business operations. Until utilized, the net proceeds, if any, received from the sale of the Company Shares and upon exercise of options and warrants may be invested in short-term interest-bearing securities or their equivalent. The Company will not receive any of the proceeds of the sale of the Selling Security Holders' Shares. 18 CERTAIN MARKET INFORMATION The Company's Common Stock is and its Redeemable Warrants were, traded on the Automated Quotation System of the National Association of Securities Dealers, Inc. ("NASDAQ") and the Boston Stock Exchange under the symbols "IATV" and "IATVW" and "IAT" and "IATW," respectively. The following table sets forth the high and low sale prices for Common Stock and Redeemable Warrants as reported by NASDAQ. The Redeemable Warrants were redeemed on May 7, 1993.
Common Stock Redeemable Warrants 1996 Quarters High Low High Low - ------------- ---- --- ---- --- First 5 3 11/16 N/A N/A Common Stock Redeemable Warrants 1995 Quarters High Low High Low - ------------- ---- --- ---- --- First 6 5/8 3 3/8 N/A N/A Second 5 1/4 4 N/A N/A Third 5 3/4 3 7/16 N/A N/A Fourth 5 13/16 3 1/8 N/A N/A Common Stock Redeemable Warrants 1994 Quarters High Low High Low - ------------- ---- --- ---- --- First 7 3/8 5 3/4 N/A N/A Second 6 1/8 5 N/A N/A Third 5 7/8 5 N/A N/A Fourth 5 1/8 3 1/8 N/A N/A Common Stock Redeemable Warrants 1993 Quarters High Low High Low - ------------- ---- --- ---- --- First 7 3/8 2 1/6 6 13/16 Second 8 1/8 4 3/4 5 2 Third 7 1/4 5 1/4 N/A N/A Fourth 8 5/8 5 1/2 N/A N/A
On February 5, 1996, there were approximately 300 holders of record of the Company's 11,414,211 outstanding shares of Common Stock. On February 5, 1996, the closing bid and asked prices of the Common Stock as reported by NASDAQ were $4 3/4 and $4 7/8, respectively. The Company has not paid cash dividends since its organization. The Company plans to use earnings, if any, to fund growth and does not anticipate the declaration or the payment of cash dividends in the foreseeable future. 19 CAPITALIZATION The following table sets forth the capitalization of the Company at September 30, 1995. See "CERTAIN TRANSACTIONS" and Consolidated Financial Statements of ACTV, Notes 12 and 13.
September 30, 1995 Long Term Debt: Note Payable - Related Party $ 222,219 ----------- Shareholders' Equity: Preferred stock, $.10 par value 1,000,000 shares authorized, none issued --- Common stock, $.10 par value 17,000,000 shares authorized, 11,375,150 issued and outstanding 1,137,515 Additional Paid-In Capital 36,634,659 Notes receivable from stock sales (567,500) Accumulated Deficit (29,195,462) ---------- Total Shareholders' Equity 8,009,212 ---------- Total Capitalization $ 8,231,431 ============
20 DIVIDEND POLICY The Company has not paid any dividends, cash or otherwise, since its inception. The Company plans to use earnings, if any, to fund growth and presently has no intention to pay any cash dividends in the foreseeable future. SUMMARY FINANCIAL DATA The selected financial data presented below as of and for the nine months ended September, 1994 and 1995, and the years ended December 31, 1994, 1993, 1992, 1991, and 1990 are derived from the financial statements of the Company that, with regard to the interim periods, are unaudited, and with regard to the annual periods, have been audited. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and the results of operations of the Company for all periods. The financial results for the interim periods presented are not necessarily indicative of the results to be expected for either succeeding quarters or the full fiscal year. This data should be read in conjunction with the financial statements referred to above, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and the other financial data included herein. 21 SUMMARY FINANCIAL DATA (in dollars, except number of shares)
Nine Months Years Ended December 31, Ended September 30, ----------------------------------------------------------- ------------------------ 1990 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- Statement of Operations: Revenues $615,011 $1,018,074 $532,596(1) $164,602(1) $938,416 $768,739 $1,075,925 Operating Expenses 4,462,771 4,435,322 2,798,847(1) 3,443,513(1) 5,734,132 4,415,721 6,816,816 Equity in Net Loss of ACTV Interactive (2) -- -- 187,781 506,303 143,500 143,500 -- Loss Before Extraordinary Item (3) 3,093,512 3,313,998 2,778,085 4,156,955 5,122,010 3,929,357 5,751,337 Net Loss (3) 3,093,512 3,313,998 2,778,085 4,156,955 4,465,240 3,407,554 5,657,220 Weighted Average Shares Outstanding 3,727,255 4,043,867 4,665,686 5,800,134 7,897,278 7,699,790 9,748,209 Loss Per Common Share Before Extraordinary Item (3) 0.83 0.82 0.59 0.72 0.65 0.51 0.59 Net Loss Per Common Share (3) 0.83 0.82 0.59 0.72 0.57 0.44 0.58 Balance Sheet Data: 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 9/30/94 9/30/95 -------- -------- -------- -------- -------- ------- ------- Working Capital 2,397,952 128,834 (104,486) 2,263,225 1,503,703 (704,003) 3,458,531 Total Assets 6,211,803 2,828,119 3,146,503 5,920,720 7,733,314 6,129,878 10,454,934 Long Term Obligations 649,796 669,796 1,792,794 2,220,794 2,325,061 2,443,866 222,219 Stockholders' Equity (4) 5,089,036 1,775,038 1,006,314 1,910,603 3,972,543 1,956,892 8,009,212 Total Capitalization 5,738,832 2,444,834 2,799,108 4,131,397 6,297,604 4,400,758 8,231,431
(1) For the period between July 15, 1992, and March 11, 1994, all education sales and expenses were reported separately by the Company's 49% affiliate, ACTV Interactive, and were not consolidated with the Company's statements of operations. For the remainder of 1994, operational results related to education were included with those of the Company, as a result of the Company's March 11, 1994 purchase of the Post Company's 51% interest in ACTV Interactive. (2) The results of ACTV Interactive are accounted for under the equity method of accounting for the years 1992 and 1993 and for the period January 1, 1994 to March 11, 1994. (3) Includes for the year ended 12/31/94 and nine months ended 9/30/94 extraordinary gains of $656,770, ($.08 per share) and $521,803 ($.07 per share), respectively, related to the extinguishment of debt and equipment lease obligations. Includes for the nine months ended 9/30/95 an extraordinary gain of $94,117 ($.01 per share) related to the extinguishment of debt obligations. (4) No cash or non-cash dividends have been paid or granted and the Company does not anticipate the declaration or payment of dividends in the foreseeable future. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto, contained elsewhere in this Prospectus. THE COMPANY ACTV, Inc. (the "Company") was organized to develop and market the ACTV Programming Technology, which permits each viewer to simultaneously experience individualized television programming. Since its inception, the Company has incurred operating losses approximating $29.2 million related directly to the development and marketing of the ACTV Programming Technology. ACTV's individualized programming is designed to work with both single and multiple channels of 6MHz band-width and with different modes of transmission: cable, direct broadcast satellite ("DBS"), multi-microwave distribution systems ("MMDS"), broadcast systems, distance learning networks and closed circuit televisions systems. It is compatible with commonly available one-way analog systems as well as the newer digital systems that have recently begun to be deployed. ACTV's strategy is to generate revenues from the sale of ACTV Programming that it either owns, has licensed or that has been created by a third party under a license from ACTV, including fees paid by subscribers to premium cable networks in which the Company has an ownership interest. The Company's mission is to improve the quality of entertainment and education television programming. The chief markets presently targeted by the Company for the ACTV Programming Technology are in-home entertainment, education (with an emphasis on distance learning), site-based entertainment and internet applications. The Company seeks to exploit these markets, principally in the U.S., through licensing the Programming Technology, by creating joint venture relationships, and by direct sales. In March 1988, the Company formed ACTV Entertainment Inc. ("ACTV Entertainment") as an equal shareholder with Le Groupe Videotron ("LGV") of Canada. The Company granted to ACTV Entertainment the exclusive right to use the Company's Programming Technology in the United States DBS, cable, and broadcast television markets. In June 1993, LGV withdrew from its ownership in ACTV Entertainment, and the Company became the sole shareholder of ACTV Entertainment under the terms of an agreement with a subsidiary of LGV. In exchange for gaining full ownership and control of ACTV Entertainment in the settlement and for the conversion of LGV's exclusive license for Canada and Europe to a non-exclusive license, the Company agreed to give up the license fee revenue it had received from LGV for LGV's use of the Programming Technology in Canada and Europe. 23 The Company and LGV entered into their original agreement during the infancy of the development of interactive television. LGV had developed its Videoway TV set-top converter, which, among other things, enabled it to provide its subscribers with interactive capacity. The arrangement provided the Company with an outlet for its ACTV Programming while providing LGV with interactive product for its Videoway converter. As both companies developed, however, their missions began to diverge: LGV wanted to market its Videoway converter in the United States, and was less interested in the actual production of ACTV Programming, while the Company was interested in expanding its production capacity and in making its ACTV Programming available for use with set-top converters manufactured and distributed by others, including other cable and broadcast network operators. The restructuring of the relationship with LGV enabled both companies to focus on their respective goals, in that LGV now has the non-exclusive right to market the Videoway converter in the United States, and the Company has control of ACTV Programming development. See "BUSINESS -- Entertainment -- Reorganization of ACTV Entertainment and the LGV Agreements; Legal Proceedings." In March 1995, the Company formed The Los Angeles Individualized Television Network, Inc., one of its wholly-owned operating subsidiaries, to operate the Company's individualized television trial in Southern California and, if the trial is successful, the planned regional television network that would target approximately 4.2 million sports subscribers in the region that reaches from Los Angeles to San Diego and Phoenix. The trial, which marked the introduction of the Company's first U.S. regional individualized network (the "Regional Network"), commenced in the Los Angeles area in May 1995. The trial involves 1,000 cable subscribers and will run throughout most of 1996 and may extend into 1997. The Company believes that the Regional Network is the first programming service in the U.S. to both enhance existing programming and offer new individualized content. Programming for the Regional Network is being provided to ACTV by Prime Sports - West, currently a unit of Telecommunications, Inc.'s ("TCI") Liberty Media, Liberty Sports division, which has approximately 4.2 million subscribers in the Southwest region of the U.S., Cable News Network, Inc. ("CNN") and the Game Show Network, a subsidiary of Sony Entertainment, Inc. ("Sony"). The cable operator for the Regional Network is Ventura County Cablevision, currently a subsidiary of Western Communications, whose ownership is scheduled to be transferred to TCI in early 1996. TCI and News Corp. have announced a joint venture, which, if completed, would see Liberty Sports become Fox Sports. See "BUSINESS - Entertainment." The Company has established four new wholly-owned subsidiaries which would serve as additional regional individualized networks covering the San Francisco, Chicago, New York and Atlanta regions in the event that the Company decides to expand and provide similar services provided by the Regional Network in other regions across the U.S. To date, the four new wholly-owned subsidiaries have not engaged in any business activities, nor does the Company have any present intention to launch their activities. The Regional Network, and any expansion plans related thereto, is part of the Company's plan to develop the entertainment division of its business which, to date, does not generate any revenue for the Company. 24 In January 1995, the Company signed an exclusive license with Greenwich Entertainment Group ("The Greenwich Group") for the use of the Programming Technology in the theater environment, specifically in shopping malls, museums and entertainment centers. The first theater opened in the Mall of America in Minneapolis, Minnesota on November 18, 1995. See "BUSINESS -- Site-Based Entertainment." In entertainment, the Company has licensed the Programming Technology to LGV and The Greenwich Group and continues to seek other licensees and joint venture partners both in and outside the United States. The Company is and will continue to be dependent upon the ability of licensees and joint venture partners to offer products and services that are commercially viable, and to actively promote and distribute the Programming Technology. The Company is and will continue to be dependent upon the ability of licensees and joint venture partners in the entertainment arena to offer products and services that are commercially viable, and to actively promote and distribute the Programming Technology. There is no assurance that the Company will be successful in reaching agreements with licensees and joint venture partners, that the Company's strategy of marketing the Programming Technology through its licensees and joint venture partners will be successful, or that the methods which its licensees and joint venture partners choose to market the Programming Technology will be successful. Further, the Company may be adversely affected by the financial and business considerations of its licensees and joint venture partners. Future joint venture and license agreements may provide that the licensees and joint venture partners will receive equity interest in the Company and/or its subsidiaries. In July 1992, the Company entered into an agreement with a subsidiary of the Washington Post Company (the "Post Company") to form ACTV Interactive, a partnership organized for the purpose of marketing products and services incorporating the Programming Technology to the education marketplace. The subsidiary of the Post Company owned a 51% share. On March 11, 1994, the Company purchased the Post Company's full 51% interest in ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million in cash at closing and a $2 million promissory note (the "Note"). The principal amount of, and accrued interest due on, the Note was paid in full in October 1995. Through March 17, 1997 (subject to extension in certain circumstances), the Post Company shall have the right to purchase from the Company, at a price to be determined, the amount of shares of Common Stock necessary to bring its percentage ownership of the total then outstanding shares of Common Stock to 51%. If such option is exercised, the Post Company will be able to control the affairs of the Company. See "RISK FACTORS - Possible Acquisition of Control by The Washington Post Company," "CERTAIN TRANSACTIONS" and "PRINCIPAL STOCKHOLDERS." The Company believes that channel capacity will not be a significant factor in the distance learning or site-based entertainment market. However, in order to be delivered over cable, MMDS or DBS systems for the in-home entertainment market, the ACTV Programming must compete for channel space on these systems, many of which have limited available channel capacity. Although a simpler form of individualization can be achieved by the Company's using 25 one channel of band-width, the more sophisticated applications of ACTV Programming currently require three to four channels of analog band-width. There is no assurance that cable, MMDS or DBS operators will devote a sufficient number of channels of band-width to the Programming Technology in the future. The Company may be limited in its ability to expand into the in-home entertainment market, unless cable, MMDS and DBS operators continue to upgrade and increase their channel capacity using some form of "compression technology," whereby the digitalization of the information required to produce a television picture reduces the channel capacity required for programming that incorporates the Programming Technology. The compression technologies recently deployed and those currently under development would enable the Company to use the more complex applications of the Programming Technology on one channel of band-width. The Company believes, although there can be no assurance, that the cable, MMDS and DBS industries are, in general, moving in the direction of increasing channel capacity. The costs associated with such compression technology may result in substantial additional costs to cable, MMDS and DBS operators. However, the Company's management cannot currently quantify such additional costs, which may adversely affect the Company's future operations. The Company is continuing its investigation of various compression techniques. See "BUSINESS." The Company anticipates continued good working relationships with both the Post Company and LGV and believes, although there can be no assurance, that the restructuring of these relationships has put the Company in an improved position with regard to its ability to enter into other strategic alliances and to seek additional financing when required. There can be no assurance, however, that such strategic alliances or additional financing will be available to the Company when desired on terms acceptable to the Company or at all. For purposes of discussing the combined statements of the Company, its subsidiaries, and ACTV Interactive, all intercompany items have been eliminated. 26 RESULTS OF OPERATIONS Comparison of the Years Ended December 31, 1993 and December 31, 1994 During the year ended December 31, 1994, the Company's revenues increased 470%, to $938,416, from $164,602 in the year ended December 31, 1993. The increase was primarily the result of the Company's recognition in the more recent period of the sales of its education subsidiary, ACTV Interactive. Prior to the Company's purchase in March 1994 of the Washington Post's 51% interest in this subsidiary, in which the Company previously owned the remaining 49% interest, the results of ACTV Interactive were accounted for under the equity method of accounting. All of the Company's revenues for the year ended December 31, 1994, were generated by its ACTV Interactive subsidiary through its activities in the education market. On a pro forma basis, assuming that the Company's results were consolidated with those of ACTV Interactive for the entire year ended December 31, 1994, (see Note 14), revenues increased 16%, to $1,128,472 compared with revenues of $970,498 pro forma in the year ended December 31, 1993. Pro Forma education sales in the year ended December 31, 1994 were $1,128,472, an increase of 34% over pro forma education sales of $842,752 in the comparable period in 1993. Cost of sales in the year ended December 31, 1994, was $296,839, all of which related to education product sales. The Company recorded no cost of sales for the year ended December 31, 1993, since it was reported separately by ACTV Interactive. Total expenses excluding cost of sales and interest expense in the year ended December 31, 1994, increased 58%, to $5,437,293, from $3,443,513 in the comparable period in 1993. This increase was partially the result of the Company's recognition in the more recent period, as explained above, of the expenses of ACTV Interactive, which in 1993 were reported separately. On a pro forma basis, total expenses (including cost of sales) before interest expense in the year ended December 31, 1994, increased 10%, to $6,220,578, from $5,674,152 in the year ended December 31, 1993. The increase was due also to higher research and development expenses, and to greater general and administrative costs associated with market and product development for application of the Programming Technology in the distance learning and in-home entertainment markets. Direct expenses related to the entertainment market for the fiscal year ended December 31, 1994 were approximately $1.4 million, and direct expenses related to the education market for the fiscal year ended December 31, 1994 were approximately $1.5 million. Depreciation and amortization expense for the year ended December 31, 1994, increased 48%, to $789,559, from $534,947 for the year ended December 31, 1993. This increase was the result of the Company's amortization of goodwill in the more recent period arising from the purchase of the Washington Post's interest in ACTV Interactive. The Company's interest expense for the year ended December 31, 1994, decreased 47%, to $226,671, compared to $428,221 in the prior year's comparable period. The decrease was due 27 in part to the elimination of expense related to original issue discount on the $1.5 million convertible note payable to the Washington Post Company. The full principal value of this note, plus all accrued interest, was converted by the Post Company into common shares of ACTV, Inc. in March 1994. Interest expense declined also due to the repayment of certain obligations of the repayment pool, as well as the accrual of interest payable on the repayment pool obligations at lower rates, in reflection of a general decline in interest rates. Interest income in the year ended December 31, 1994, increased 8%, to $47,409, compared with $43,877 in the year ended December 31, 1993. The increase resulted from higher available cash balances in the more recent period. For the year ended December 31, 1994, the Company's net loss before extraordinary items was $5,122,010, or $.65 per share, an increase of 23% over the net loss of $4,156,955, or $.72 per share, incurred in the prior year's comparable period. The Company recorded an extraordinary gain of $656,770 in the year ended December 31, 1994, the result of the extinguishment of certain obligations for value that was less than the amounts recorded on the Company's books for such obligations. Net loss after the extraordinary gain for the year ended December 31, 1994, was $4,465,240, or $.57 per share. Comparison of Years Ended December 31, 1993 and December 31, 1992 During the fiscal year ended December 31, 1993 ("Fiscal 1993"), ACTV's revenues decreased approximately 70% to $164,602 from $532,596 in the fiscal year ended December 31, 1992 ("Fiscal 1992"). The decrease was partially the result of the Company's having to exclude for the entire Fiscal 1993 all education sales, which were reported in the more recent year by the Company's 49% subsidiary, ACTV Interactive. ACTV Interactive's gross sales were $839,165 in Fiscal 1993, compared with $348,473 for the period from the partnership formation date -- July 14, 1992 -- to December 31, 1992. Prior to the formation of the partnership, the Company had recorded education sales in Fiscal 1992 of $186,598. ACTV Interactive's results were accounted for under the equity method of accounting. Combined revenues of ACTV and ACTV Interactive in Fiscal 1993 were $970,498, an 11% increase over Fiscal 1992 combined revenues of $873,346 for the two companies. An additional factor in the Fiscal 1993 revenue decrease reported by ACTV was the Company's June 1993 agreement with LGV, pursuant to which LGV now has a royalty-free right to use the Company's Programming Technology. Pursuant to the prior LGV agreement the Company had received $127,746 in license revenue from LGV during 1993. The Company's Fiscal 1992 revenues related to LGV were $338,275. Total expenses before interest expense increased approximately 23% in Fiscal 1993 to $3,443,513 from $2,798,847 in Fiscal 1992. General and administrative and operating expenses both decreased in 1993 as compared to 1992, but non-cash compensation expense associated with the Company's SAR Plan increased due to an increase in the market price of the Company's Common Stock. In 1992, the Company recorded expenses for part of the year related to the education market that in 1993 were borne entirely by ACTV Interactive. Depreciation and amortization expense declined to $534,947 in Fiscal 1993 from $635,275 in Fiscal 1992, a decline of approximately 16%, as a result of the full amortization and depreciation of certain 28 programs and fixed assets, respectively, during 1993. Expenses related to the Company's renewed research and development program were $171,802. As has been noted above, since the formation of ACTV Interactive in mid-1992, revenues and expenses relating to the education market previously included in the financial statements of the Company have been reflected in the financial statements of ACTV Interactive until March 1994. As a result, the Company has experienced a general reduction in its revenue and cash expense levels. Combined total expenses of ACTV and ACTV Interactive in Fiscal 1993 before interest expense were $5,315,407, a 49% increase over Fiscal 1992 combined expenses of $3,553,201 for the two companies. During Fiscal 1993, interest expense was $428,221, compared to interest expense of $343,008 for Fiscal 1992. Interest expense in both years related primarily to the accrual of interest in connection with the $1,500,000 8% convertible note payable to the Post Company (the "Convertible Note") and the amortization as interest expense of the discount on such debt. Interest income in Fiscal 1993 was $56,480, compared to interest income of $18,955 for Fiscal 1992. The increase was a result of the Company's higher cash balances during the more recent period. The Company's net loss in Fiscal 1993 increased approximately 49% to $4,156,955 ($.72 per share) from $2,778,085 ($.59 per share) in Fiscal 1992, due primarily to the decline in royalty revenues, resulting from the Company's June 1993 agreement with LGV, as explained above, higher non-cash compensation expense, and to higher losses from ACTV Interactive under the equity method of accounting. Comparison of Nine Month Periods Ended September 30, 1995 and September 30, 1994 During the nine month period ended September 30, 1995, the Company's revenues increased 40%, to $1,075,925, from $768,739 in the nine month period ended September 30, 1994. The increase was the result of higher sales to the education market, including revenues relating to the Company's new distance learning product. The increase was also partially due to the inclusion of the Company's education sales for the entire nine month period of 1995 versus only a portion of the comparable period in 1994. From January 1, 1994, to March 11, 1994, education sales were reported separately by the Company's 49% subsidiary ACTV Interactive, which was acquired in full by ACTV, Inc. on March 11, 1994. Prior to this purchase, the results of ACTV Interactive were accounted for under the equity method of accounting. Cost of sales in the nine months ended September 30, 1995, was $318,665, an increase of 36% over cost of sales of $233,661 in the nine months ended September 30, 1994. The Company's cost of sales as a percentage of sales revenue on a year to year basis remained stable at 30.4% in 1994 and 29.6% in the 1995 period. Total expenses excluding cost of sales and interest expense in the nine months ended September 30, 1995, increased 55%, to $6,498,151, from $4,182,060 in the comparable period in 1994. This increase was partially the result of the Company's recognition in the more recent period, as explained above, of the expenses of ACTV Interactive, which for a portion of the 1994 period 29 were reported separately. The increase was due also to significantly greater expenses related to the Company's SAR plan principally due to an increased market price of the Company's Common Stock at September 30, 1995, higher research and development expenses, and to greater general and administrative costs associated with the launch in May 1995 of the Company's individualized television trial in California. (See "Management -- Stock Options and Stock Appreciation Rights.") Depreciation and amortization expense for the nine months ended September 30, 1995, increased 43% to $819,040, from $571,133 for the nine months ended September 30, 1994. This increase was partially the result of the Company's amortization for the entire nine month period of 1995 versus a portion of the same period in 1994 of goodwill arising from the purchase of the Post Company's interest in ACTV Interactive. In addition, for the nine months ended September 30, 1995, the Company recorded increased depreciation expense related to equipment purchased for the California trial referred to above. The Company's interest expense for the nine months ended September 30, 1995, decreased 49%, to $93,596, compared to $184,186 in the prior year's comparable period. The decrease was due in part to the elimination of expense related to original issue discount on the $1.5 million convertible note payable to the Post Company. The full principal value of this note, plus all accrued interest, was converted by the Post Company into common shares of ACTV, Inc. in March 1994. Interest expense declined also due to a decrease in notes payable during the more recent period. Interest income in the nine months ended September 30, 1995, was $83,150, compared with $37,995 in the nine months ended September 30, 1994. The increase resulted from higher available cash balances and higher prevailing market rates of interest in the more recent period. For the nine months ended September 30, 1995, the Company's net loss before extraordinary items was $5,751,337 or $.59 per share, an increase of 46% over the net loss before extraordinary items of $3,929,537, or $.51 per share, incurred in the prior year's comparable period. The Company recorded extraordinary gains of $94,117 in the nine months ended September 30, 1995 and $521,803 in the nine months ended September 30, 1994, the result of the extinguishment of certain obligations for value that was less than amounts recorded on the Company's books for such obligations. Net loss after extraordinary gain for the nine months ended September 30, 1995, was $5,657,220, or $.58 per share, an increase of 66% over the net loss after extraordinary gain for the comparable period of 1994 of $3,407,554, or $.44 per share. Comparison of Nine Month Periods Ended September 30, 1994 and September 30, 1993 During the nine month period ended September 30, 1994, the Company's revenues increased 391%, to $768,739, from $156,648 in the nine month period ended September 30, 1993. The increase was primarily the result of the Company's recognition in the more recent period of the sales of its education subsidiary, ACTV Interactive. Prior to the Company's purchase in March 1994 of the Post Company's 51% interest in this subsidiary, in which the Company previously owned the remaining 49% interest, the results of ACTV Interactive were accounted for under the equity method of accounting. On a pro forma basis, assuming that the Company's results were consolidated with those of 30 ACTV Interactive for the entire nine month period ended September 30, 1994, (see Note 5), revenues increased 25%, to $958,795, compared with revenues of $765,471 pro forma in the nine months ended September 30, 1993. Pro Forma education sales in the nine months ended September 30, 1994 were $958,795, an increase of 50% over pro forma education sales of $637,725 in the comparable period in 1993. Cost of sales in the nine months ended September 30, 1994, was $233,661, all of which cost related to education product sales. The Company recorded no cost of sales for the nine months ended September 30, 1993, since it was reported separately by ACTV Interactive. Total expenses excluding cost of sales and interest expense in the nine months ended September 30, 1994, increased 93%, to $4,182,060 from $2,165,129 in the comparable period in 1993. This increase was partially the result of the Company's recognition in the more recent period, as explained above, of the expenses of ACTV Interactive, which in 1993 were reported separately. The increase was due also to higher research and development expenses, and to greater general and administrative costs associated with market and product development for application of the Programming Technology in the distance learning, in-home entertainment, and in-room hotel entertainment markets. On a pro forma basis, total expenses before interest expense in the nine month period ended September 30, 1994, increased 25%, to $4,182,060, from $3,347,857 in the nine months ended September 30, 1993. Depreciation and amortization expense for the nine months ended September 30, 1994, increased to $571,133, from $420,953 for the nine months ended September 30, 1993. This increase was the result of the Company's amortization in the more recent period of goodwill arising from the purchase of the Post Company's interest in ACTV Interactive. The Company's interest expense for the nine months ended September 30, 1994, decreased 43%, to $184,186, compared to $321,000 in the prior year's comparable period. The decrease was due in part to the elimination of expense related to original issue discount on the $1.5 million convertible note payable to the Post Company. The full principal value of this note, plus all accrued interest, was converted by the Post Company into common shares of ACTV, Inc. in March 1994. Interest expense declined also due to the repayment of certain obligations of the Repayment Pool, as well as the accrual of interest payable on the Repayment Pool obligations at lower rates, in reflection of a general decline in interest rates. Interest income in the nine months ended September 30, 1994, was $37,995, compared with $36,322 in the nine months ended September 30, 1993. The increase resulted from higher available cash balances in the more recent period. For the nine months ended September 30, 1994, the Company's net loss before extraordinary items was $3,929,357, or $.51 per share, an increase of 48% over the net loss of $2,646,382, or $.44 per share, incurred in the prior year's comparable period. The Company recorded an extraordinary gain of $521,803 in the nine months ended September 30, 1994, the result of the extinguishment of certain obligations for value that was less than the amounts recorded on the Company's books for such obligations. Net loss after the extraordinary gain for the nine months ended September 30, 1994, was $3,407,554, or $.44 per share. Liquidity and Capital Resources 31 Since its inception, the Company (including its operating subsidiaries ACTV Entertainment, ACTV Interactive, Inc., The Los Angeles Individualized Television Network, Inc., and 3D Virtual, Inc.) has not generated revenues sufficient to fund its operations, and has incurred operating losses. Through September 30, 1995, the Company had an accumulated deficit of approximately $29.2 million. The Company's cash position on September 30, 1995, was $5,090,642, compared to $2,479,840 on December 31, 1994. During the nine month period ended September 30, 1995, the Company used $3,726,023 in cash for its operations, compared with $3,064,151 for the nine month period ended September 30, 1994. The increase in the nine month period ended September 30, 1995, was due to higher selling and administrative expenses and to increased operating activity in the more recent year related to the Company's individualized television trial launched in May 1995. The Company met its cash needs in the nine month period ended September 30, 1995, from the proceeds of sales of common stock to private investors completed in the last quarter of 1994 and during the first three quarters of 1995. The Company met its cash needs in the nine month period ended September 30, 1994, from the remaining proceeds of the redemption of its Redeemable Warrants in May 1993, as well as from the exercise of warrants by the Post Company in March 1994. With respect to investing activities in the nine month period ended September 30, 1995, the Company used cash of $556,926 related to equipment purchases for the California trial referred to above. In the nine month period ended September, 1994, the Company used cash of $2,500,000 to purchase the Post Company's 51% interest in ACTV Interactive and cash of $111,691 related to new patent filings. ACTV Entertainment, ACTV Interactive and The Los Angeles Individualized Television Network, Inc. and 3D Virtual, Inc. are dependent on advances from the Company to meet their obligations. The Company's balance sheet as of September 30, 1995, also reflects the accrual of expenses of $1,294,148 related to the Company's stock appreciation rights plan, a decrease of $101,458 in notes payable resulting from the discounted prepayment of a note, and a decrease in notes payable of $2,000,000, the amount of principal repayments that the Company made in May, July, and September 1995. In addition, the Company repaid the remaining notes payable balance of approximately $220,000 in October 1995. During the year ended December 31, 1994, the Company used $3,885,852 in cash for its operations, compared with $1,352,273 in the year ended December 31, 1993. The increase in the more recent period was due to higher general and administrative expenses as noted above, and to the inclusion of the results of operations of the Company's education subsidiary. The Company met its cash needs in the year ended December 31, 1994, principally from the remaining proceeds of the redemption of its Redeemable Warrants in May 1993, from the exercise of options by the Post Company and by others (aggregating $1,646,159 in proceeds) and from a series of private sales of the Company's Common Stock during the fourth quarter of the year (aggregating $2,968,338 in proceeds). During the year ended December 31, 1994, the Company used cash of $136,020 and issued notes for $215,000 to extinguish obligations recorded at an aggregate value of $1,000,666 as of December 31, 1993. 32 During the year ended December 31, 1994, the Company advanced approximately $350,000 to its ACTV Entertainment subsidiary, and approximately $390,000 to its ACTV Interactive subsidiary. Advances are based upon budgeted expenses and revenues for each respective subsidiary. Adjustments are made during the course of the year based upon the subsidiary's performance versus the projections made in the budget. With respect to investing activities, the Company used cash of $2,500,000, to purchase the Post Company's 51% interest in ACTV Interactive and cash of $142,122 related to new patent filings. The Company had only minimal other investing activities in the period. During 1994, the Company raised $1,500,000 in equity from the conversion by the Post Company of its option to purchase 750,000 shares of the Company's Common Stock at $2.00 per share. In a separate transaction, the Company eliminated its convertible note payable obligation to the Post Company, as the Post Company converted the note's full principal and accrued interest of $1,742,667 into 871,334 shares of the Company's Common Stock at $2.00 per share. The Company's balance sheet at December 31, 1994, reflects an increase in note payable of $2,000,000, plus accrued interest, resulting from the purchase by the Company of the Post Company's interest in ACTV Interactive. The Company's balance sheet at December 31, 1994 also reflects the accrual of an expense of $750,192 related to the Company's stock appreciation rights plan and an increase in note payable resulting from the settlement of an equipment lease obligation. During the twelve months ended December 31, 1993, the Company used $1,352,273 in cash for its operations, compared with $1,537,419 in the twelve months ended December 31, 1992. The decrease in net cash used in operations results primarily from reduced expenditures associated with the education market. During the twelve months ended December 31, 1993, the Company met its cash needs primarily from the proceeds of warrant redemptions, which generated net proceeds of approximately $4.5 million. The Company's investing activities reflect minimal fixed asset additions. The Company believes that it may be required to expend approximately $200,000 in the first quarter of 1996 to facilitate the completion of current research and development projects. In the first nine months of 1995, the Company raised approximately $8.9 million from the sale of shares of the Company's Common Stock (including approximately $5.7 million during the three months ended September 30, 1995). Management of the Company believes that its current funds will enable the Company to finance its operations for at least the next twelve month period. However, if the Company's assumptions and beliefs prove to be incorrect, the Company may require additional financing during this period. In the event that the Company does require additional financing, the Company has no agreements, arrangements or understandings to obtain such additional financing. The Company does not have any material contractual commitments for capital expenditures. Impact of Inflation Inflation has not had any significant effect on the Company's operating costs. 33 BUSINESS General ACTV, Inc. ("ACTV" or the "Company") has developed proprietary Programming Technologies (the "Programming Technology") that individualize television programming. ACTV's Programming Technology permits the delivery of individualized television, which, in the Company's view, significantly enhances the quality of most genres of television programming. ACTV's Programming Technology provides instant and seamless changes in the live or prerecorded video picture and/or audio and/or graphics in response to the various selections supplied by each viewer. A specially prepared ACTV program (the "ACTV Program" or "ACTV Programming") is like a linear TV program, except that it appears to be individualized for each viewer. (Linear programs are standard television programs that can be viewed only as created and do not offer the viewer the option to make choices as to the content of the program or to respond to the contents of the program in an individualized way.) There is no limit to the number of viewers who can interact simultaneously with an ACTV Program. ACTV's individualized programming is designed to work with both single and multiple channels of 6MHz band-width and with different modes of transmission: cable, direct broadcast satellite ("DBS"), multi-microwave distribution systems ("MMDS"), broadcast systems, distance learning networks and closed circuit televisions systems. It is compatible with commonly available one-way analog systems as well as the newer digital systems that have recently begun to be deployed. ACTV's strategy is to generate revenues from the sale of ACTV Programming that it either owns, has licensed or that has been created by a third party under a license from ACTV, including fees paid by subscribers to premium cable networks in which the Company has an ownership interest. The Company's mission is to improve the quality of entertainment and education television programming. The Company also believes that the Programming Technology can enhance the quality of television advertising by enabling the advertiser to customize each commercial for various audience segments. It is the Company's objective to seek advertiser support for its individualized home entertainment networks. The chief markets presently targeted by the Company for the ACTV Programming Technology are in-home entertainment, education (with an emphasis on distance learning), site-based entertainment and internet applications. The Company seeks to exploit these markets, principally in the U.S., through licensing the Programming Technology, by creating joint venture relationships, and by direct sales. The Company has eight subsidiaries, which include a national entertainment company, a national education company, a three-dimensional company, and five regional television networks; ACTV Entertainment Inc., a New York corporation ("ACTV Entertainment") incorporated on March 9, 1988, ACTV Interactive, Inc., a Delaware corporation incorporated on July 8, 1992, 3D Virtual, Inc., a Delaware corporation incorporated on July 20, 1995, The Los Angeles Individualized Television Network, Inc., a Delaware corporation incorporated on March 7, 1995, The San Francisco Individualized Television Network, Inc., a Delaware corporation 34 incorporated on December 22, 1995, The Chicago Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, The New York Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, and The Atlanta Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995. Unless otherwise indicated, all references in this Prospectus to the Company or ACTV include ACTV and its eight subsidiaries. ACTV was incorporated under the laws of the State of Delaware on July 24, 1989. The Company is the successor, by merger effective November 1, 1989, to ACTV, Inc., a California corporation, organized on July 11, 1983. The Company's executive offices are located at 1270 Avenue of the Americas, New York, New York 10020, telephone number (212) 262-2570. Entertainment ACTV first introduced its individualized programming applications for entertainment outside the United States. The Company is now in its fifth year of regional commercialization in Canada and London through a license with Le Groupe Videotron, Ltee. ("LGV"), the second largest Canadian cable/broadcast television company and a major cable operator in London where it is building and operating combined cable/telephone networks. ACTV's Programming Technology is part of LGV's Videoway systems, which includes a premium interactive cable channel, video games and various videotext offerings ("Videoway"). Under the LGV license, which was modified on June 8, 1993, LGV has a 20-year, non-exclusive, royalty-free license to manufacture Videoway terminals that incorporate ACTV's Programming Technology. The agreement also allows LGV to produce ACTV Programming itself for a certain number of potential Videoway subscribers in Canada (1,300,000), Europe (500,000), and the United States (500,000). The license is subject to the condition that neither LGV nor its sub- licensees receive any royalty or other fees with respect to ACTV Programming, except for promotion and direct production expenses paid by LGV. Any royalties from third parties will be paid exclusively to ACTV. See "Reorganization of ACTV Entertainment and the LGV Agreements." The Company and LGV entered into their original agreement during the infancy of the development of interactive television. LGV had developed its Videoway TV set-top converter, which, among other things, enabled it to provide its subscribers with interactive capacity. The arrangement provided the Company with an outlet for its ACTV Programming while providing LGV with interactive product for its Videoway converter. As both companies developed, however, their missions began to diverge: LGV wanted to market its Videoway converter in the United States, and was less interested in the actual production of ACTV Programming, while the Company was interested in expanding its programming capacity and in making its ACTV Programming available for use with set-top converters manufactured and distributed by others. The restructuring of the relationship with LGV enabled both companies to focus on their respective goals, in that LGV now has the non-exclusive right to market the Videoway converter in the United States, and the Company has control of ACTV Programming development. See "Reorganization of ACTV Entertainment and the LGV Agreements." 35 ACTV's strategy is to take the regional experience gained in the last five years in Canada and London and apply it in the U.S. The Company anticipates that its individualized programming will be launched through regional premium cable programming services that are advertiser-supported, with monthly subscription prices comparable to other U.S. premium channels. While the Company has commenced testing its individualized programming in the U.S., as set forth below, no assurance can be given that such testing will be successful, or that the Company will launch its individualized programming in the U.S. In March 1995, the Company formed The Los Angeles Individualized Television Network, Inc., one of its wholly-owned operating subsidiaries, to operate the Company's individualized television trial in Southern California and the planned regional television network that would roll-out to the potential 4.2 million sports subscribers in the region that reaches from Los Angeles to San Diego and Phoenix, if the trial is successful. The trial, which marked the introduction of the Company's first U.S. regional individualized network (the "Regional Network"), commenced in the Los Angeles area in May 1995. The trial involves 1,000 cable subscribers and will run throughout most of 1996 and may extend into 1997. The Company believes that the Regional Network is the first programming service in the U.S. to both enhance existing programming and offer new individualized content. Programming for the Regional Network is being provided to ACTV by Prime Sports - West, currently a unit of TCI's Liberty Media, Liberty Sports division, which has 4.2 million subscribers in the Southwest region of the U.S. Prime Sports - West is providing the Company with access to all its regional sports programming at no cost to the Company. Similarly, Cable News Network, Inc. ("CNN") plans to provide, at no cost to the Company, access to Prime News, Sports Tonight, Inside Politics and other selected shows. In addition, the Game Show Network ("GSN"), a subsidiary of Sony Entertainment, Inc. ("Sony") will provide GSN programs at no cost to the Company in return for consumer research, pursuant to an agreement entered into in November 1995. The cable operator for the Regional Network is Ventura County Cablevision, currently a subsidiary of Western Communications, whose ownership is scheduled to be transferred to TCI in early 1996. TCI and News Corp. have announced a joint venture which, if completed, would see Liberty Sports become Fox Sports. In all cases, the Company is responsible for the incremental content, transmission, delivery and master control costs incurred in connection with the enhancement of the Prime Sports - West CNN and Sony programming. In February 1994, the Company entered into an arrangement with Prime Sports, with respect to the Regional Network. Assuming future commercialization of a regional network in the footprint of Prime Sports - West no later than December 31, 1996, Prime Sports - West would receive an exclusive in its footprint for sports programming and the companies will pursue a business understanding of revenue sharing anticipated to include a license fee paid to Prime Sports - West for each subscribing household on a monthly basis. 36 In August 1995, the Company entered into an agreement with CNN with respect to the Regional Network. Upon commercialization, CNN and ACTV will negotiate a royalty agreement and/or advertising split for use of CNN programming. In addition, CNN shall receive protection until December 31, 1997 to become ACTV's exclusive provider of national and international news. CNN will also be given the opportunity to be an equity investor in any new regional networks created by ACTV. Regional Network viewers, in addition to sports, news and game shows, are able to individualize both CNN programs and L.A. Lakers basketball, L.A. Kings hockey, California Angels baseball and other Prime Sports - West offerings. In addition to sports, news events and game shows, the Regional Network is transmitting other individualized programming, including children's and education programs. The Company plans, assuming a successful test phase, to direct initial marketing of the Regional Network toward a majority of Ventura City Cablevision's 90,000 subscribers in the Los Angeles and Ventura County areas. In addition, expansion could follow in other Prime Sports - West markets and, in stages, in other regional markets within the U.S. The Company has established four new wholly-owned subsidiaries which would serve as additional regional individualized networks covering the San Francisco, Chicago, New York and Atlanta regions in the event that the Company decides to expand and provide the services provided by the Regional Network in other regions across the U.S. To date, the four new wholly-owned subsidiaries have not engaged in any business activities, nor does the Company have any present intention to launch their activities. The Regional Network, and any expansion plans related thereto, is part of the Company's plan to develop the entertainment division of its business, which to date, does not generate any revenue for the Company. There can be no assurance that the results predicted with respect to the Regional Network will be realized, or if realized, will generate significant revenues for the Company. Education ACTV's principal strategy in education is to become the leading individualized programming technology in the developing field of distance learning, in which ACTV Programming, both live and pre-recorded, can be transmitted simultaneously to multiple sites in a satellite, fiber or microwave network. ACTV is currently developing new two-way analog and digital programming technologies for distance learning. This is a point-to-multipoint interactive broadcast system that can deliver prerecorded interactive lessons or integrate interactive segments into live distance learning lessons. By using a simple remote control, the student is able to alter program content to suit specific needs and interests. Students receive individualized responses to their input, and at the end of the lesson, the classroom teacher receives a printout of the performance of each class member. ACTV's new distance learning system is being commercially introduced, with an installation in Georgia, that the Company believes will represent one of the industry's most advanced distance learning projects. ACTV and the State of Georgia have entered into an agreement through which ACTV's distance learning system and software will be integrated into the Georgia 37 Statewide Academic and Medical System ("GSAMS"), an existing fully interactive service providing audio, video and data to classrooms. In addition, 123 individualized television titles have been produced and introduced into the kindergarten to 12th grade market. The programs focus on reading, math, and vocational education. To date, programs have been sold to approximately 300 different schools across the U.S., along with an ACTV classroom system -- a terminal with compatible ACTV Programming functionality that currently permits up to 24 students in a classroom to view single channel ACTV Programs simultaneously. Education products are marketed through a direct and distributor sales force. Individualized programming is produced jointly through license agreements with educational publishers, including Turner Educational Services, Inc. ("Turner"), Phoenix, Bergwall, AIT, AIMS, Hastey Pudding and TakeOff. In 1995, the Company also signed a distance learning agreement with General Instrument Corporation ("GI"). ACTV's Programming Technology for distance learning will be integrated with GI's DigiCipher'r' system. The new digital system will be called "DigiCipher/ACTV Distance Learning System" and will allow programming networks to develop individualized programming and distribute it digitally to their customers. The Company markets its products through its wholly owned subsidiary ACTV Interactive, Inc., which was formed in 1992. Originally a joint venture general partnership with the Washington Post Company (the "Post Company"), ACTV Interactive became a wholly owned subsidiary of the Company in March 1994. Site-Based Entertainment and Internet Applications In January 1995, the Company granted an exclusive license to Greenwich Entertainment Group ("The Greenwich Group") for the use of its Programming Technology in the theater environment, specifically in shopping malls, museums and entertainment centers. The Company will receive an 8% to 10% royalty of annual ticket sales per theater, dependent upon each theater's volume. The Company will receive a minimum royalty of $200,000 in 1996, $500,000 in 1997, $1,000,000 in 1998, $1,250,000 in 1999 and $1,500,000 in the year 2000 and thereafter. If the minimum is not paid, the Company has the right to cancel its license as to future theaters. The first theater opened in the Mall of America in Minneapolis, Minnesota on November 18, 1995. In July 1995, the Company established a new wholly-owned subsidiary, 3D Virtual, Inc., to explore the commercial possibilities of integrating three-dimensional ("3D") technology and the Company's Programming Technology, using new technology for which a patent is currently pending. Initial business activity for the development of a prototype has just commenced. 38 In December 1995, the Company entered into a joint venture agreement with EarthWeb, LLC, a developer of internet technologies and a pioneer in JAVA'tm' language applications, to develop new joint internet software applications. ACTV Programming Technology The ACTV Programming Technology provides instant and seamless changes in the live or prerecorded video picture and/or audio and/or graphics based on various selections made by viewers. The program appears to be a standard TV program, as if it were individualized for each viewer. Viewer selections are made through a four-button remote control, thereby limiting the viewer's number of choices when inputting each response to four answers previously anticipated by the program's creators. ACTV's process of creating individualized television programming involves viewer selection from a multiple number of frame-synchronized video, graphics, and/or audio signals delivered at one time. The viewer sees and/or hears only one of the signals at a given moment; the other signals are transparent. Using a remote control, the viewer interacts with the television by making selections or decisions called for by the specially prepared programming. In response to viewer's inputs, the ACTV Programming Technology, which uses a microprocessor, automatically switches at pre-determined intervals between various segments of the multiple signals. In one-way analog transmission, this switching will occur in the viewer's cable box, such as LGV's Videoway, while with two way transmission, it may occur at the source of the transmission. The viewer cannot detect when such a switch takes place because it occurs instantly and with frame accuracy. The results appear seamless and uninterrupted -- for the viewer the programming is completely individualized. Although an individualized program and its associated branches are taped in a normal linear fashion, the program, when shown, has thousands of possible permutations and combinations available for each viewer to experience. The particular version seen is based on each viewer's individually selected preferences and inputs. An unlimited number of independent viewers can interact with an ACTV Program simultaneously. The ACTV microprocessor receives digital information from codes embedded into the video program material. It thus maintains "memory" on the progress of the viewer and provides automatic branching. At appropriate times during the program, the microprocessor circuitry will make branch switches automatically, accumulate data, recall information, create graphics and/or implement a pre-programmed set of instructions. In single channel analog (6MHz of band-width) applications, ACTV's Programming Technology can individualize audio and/or graphics, based on multiple signals. When additional analog channels of band-width are available, video can be individualized as well. In digital systems multiple video, audio and graphics can be individualized in 6MHz of band-width. To develop individualized programming the Company generally seeks to form joint ventures or licensing agreements with producers of standard linear shows or with networks that have rights to such shows. ACTV Programming can be created in a number of ways: enhancing existing programs that have been produced in a standard linear format, adding "piggy-back" branch 39 alternatives during the shooting of ongoing shows, or creating entirely original productions that are solely for ACTV's purposes. The cost of ACTV original productions has been on average approximately 20% higher than a linear version of the same program of comparative length. However, production costs are significantly lower than regular linear television shows when existing material can be enhanced, or when productions are "piggy-backed." Production costs vary significantly based upon the nature and type of programming to be produced. An advantage of individualized programming is its higher repeatability, as compared to standard programming, since an individualized program's cost can be amortized over a greater number of showings. The types of entertainment programs that the Company plans to emphasize are sports, news, education, game shows, children's programs and music. The Company envisions that its in-home services will be supported by individualized advertising. The programming focus for education is reading, math and vocational education. Examples of ACTV Programming are: 1) Sports. Sporting events in the ACTV individualized format allow each viewer in essence to become the director of the program by selecting close-ups, wide angle shots, replays, statistics, player interviews and other features as may be provided. ACTV's Programming Technology also allows the viewer to respond to questions posed throughout the game. The system's memory records these responses and winners may be offered promotional premiums, such as tickets to future games. 2) News. In the first segment of a news program, viewers can choose between in-depth follow-ups of headline stories. Later in the program, viewers can choose segments on different categories of news (international, financial, entertainment, politics, etc.). 3) Children's Programs. ACTV's Programming Technology allows children to participate in television programs by answering questions from the characters on screen, giving the characters advice -- even changing the plot of the program. In addition to this dialogue children can have with the characters, children can also be asked to predict the outcome of events, or as with sports, see an event from different angles. 4) Music. Viewers are able to select a particular music video they want to see, or the order they want to see them. Viewers may also choose to see the lyrics of a music video, or access other information about the musicians. In addition, with live or prerecorded concert performances, viewers can select from up to four camera angles in a manner similar to live sports broadcasting. 5) Game Shows. The Programming Technology allows game show viewers to actively participate in the game. They can decide which celebrity team to play on, enter their answers and receive individualized responses to their choices. The system's memory ability keeps the viewers informed of their performance and provides final results at the conclusion of the show. This provides advertisers and sponsors with the opportunity to offer promotional premiums to viewers with the best scores. 40 6) Advertising. ACTV's Programming Technology offers television advertisers unique opportunities to target their message. Commercials can be targeted demographically: men, women, boys and girls can all see different commercials during the same commercial break. By asking the viewer basic questions at the beginning of the program, the ACTV Programming Technology can recall this information during a commercial break and based upon such information send the viewer the appropriate advertisement. A second advantage for advertisers is the concept of individualized commercials. For example, before a commercial break in a sporting event, viewers are asked which type of car they would like to hear about: sedan, truck, sport utility or luxury sedan. ACTV's Programming Technology records this choice, then sends the appropriate commercial to each viewer. This same choice can be recalled at a later commercial break to provide additional information. 7) Live Distance Learning. Distance learning ("DL") networks typically involve a teacher broadcasting a lesson to dozens or even hundreds of remote classroom sites. ACTV's Programming Technology for DL allows the DL teacher to create questions or offer choices relating to the lesson and pre-record individualized responses. At selected points in the lesson, the DL teacher can initiate the questions and interactions, with each student across the network receiving individualized responses. In addition, the ACTV Programming Technology gives the teacher immediate feedback on the students' responses, allowing the teacher to pace the lesson accordingly. The system's memory component can recall each student's performance throughout the entire semester, giving the teacher a detailed accounting of their progress. 8) Educational Programming. Younger classroom students learn basic reading and math skills, and older students learn vocational and career skills, in pre-recorded individualized television programs using the ACTV Programming Technology. Just as in the case of the DL programming, as the pre-recorded television program progresses, a teacher appears on screen and asks the students questions about the material presented. Students respond to the questions, then receive individualized feedback based on their answers. At the end of the lesson, the classroom teacher receives a report detailing the results of the performance of the entire class, as well as the performance of each individual student. Research and Development The Company is engaged in a field characterized by extensive research efforts and rapid, significant technological change. During 1993, the Company began its current research and development projects, relating primarily to the development of a new analog/digital two-way distance learning system. The Company believes that it may be required to expend approximately $200,000 in the first quarter of 1996 to complete the development of this system. There can be no assurance that research or development by others will not render the Programming Technology obsolete or that the research and development performed by the Company and/or its licensees and joint venture partners will continue or will be successful. The Company entered into a collaborative agreement in August, 1995 with The David Sarnoff Research Center to investigate and potentially develop digital applications of the Programming Technology. 41 Government Regulation The Company believes, on the basis of its review of current legislation and regulations that neither its present nor any proposed commercial implementation of the ACTV Programming Technology on distance learning networks, closed circuit television systems, cable, DBS or MMDS will require governmental license or approval. Certain broadcast applications and copper pairs with ADSL may require governmental approval. No assurance can be given that applicable laws will not change. In the event such approval were to be required, there can be no assurance that the Company would be able to obtain such approval or the licenses required for the further implementation of the ACTV Programming Technology. Marketing and Program Production The primary markets targeted by the Company for the ACTV Programming Technology are in-home entertainment, education (with an emphasis on distance learning), and site-based entertainment. The Company seeks to exploit these markets principally in the US through licensing the Programming Technology, by creating joint venture relationships, and by direct sales. To date, the Company's capital requirements to develop the Programming Technology, produce ACTV Programming, develop marketing approaches and strategic alliances, and to cover costs of sales and general and administrative expenses, have been significant, resulting in an accumulated deficit as of September 30, 1995 of approximately $29.2 million. The Company will continue to implement a marketing program consisting of the employment of sales and marketing personnel, contracting with sales and marketing consultants, and the use of promotional efforts, including product demonstrations and participation in trade shows and conferences. The Company currently has two entertainment marketing executives, four educational sales people and fifteen educational distributors. In entertainment, the Company has licensed the Programming Technology to LGV and The Greenwich Group and continues to seek other licensees and joint venture partners both in and outside the United States. The Company is and will continue to be dependent upon the ability of licensees and joint venture partners to offer products and services that are commercially viable, and to actively promote and distribute the Programming Technology. According to LGV, Videoway subscribers use an average of 13 hours per week of interactive services: 5.5 hours of video games, 2.5 hours of information services, and 5 hours of ACTV Programming -- primarily consisting of sports, news, game shows, and children's shows. In addition, focus group testing in Los Angeles that preceded the Prime Sports - West and CNN agreements indicated interest in ACTV sports, news, game shows, and in its educational and children's programming. The Greenwich Group has licensed the Programming Technology for use in the theater environment, principally in shopping malls. The first children's theater opened in the Mall of America in Minneapolis, Minnesota, on November 18, 1995. 42 In March 1995, the Company formed The Los Angeles Individualized Television Network, Inc., one of its wholly-owned operating subsidiaries, to operate the Company's individualized television trial in Southern California and the planned regional television network that would roll-out to the potential 4.2 million sports subscribers in the region that reaches from Los Angeles to San Diego and Phoenix, if the trial is successful. The trial, which marked the introduction of the Company's first U.S. regional individualized network (the "Regional Network"), commenced in the Los Angeles area in May 1995. The trial involves 1,000 cable subscribers and will run throughout most of 1996 and may extend into 1997. The Company believes that the Regional Network is the first programming service in the U.S. to both enhance existing programming and offer new individualized content. Programming for the Regional Network is being provided to ACTV by Prime Sports - West, currently a unit of TCI's Liberty Media, Liberty Sports division, which has approximately 4.2 million subscribers in the Southwest region of the U.S., CNN and GSN. The cable operator is Ventura County Cablevision, currently a subsidiary of Western Communications, whose ownership is scheduled to be transferred to TCI in early 1996. TCI and News Corp. have announced a joint venture, which, if completed, would see Liberty Sports become Fox Sports. See "BUSINESS -- Entertainment." The Company has established four new wholly-owned subsidiaries which would serve as additional regional individualized networks covering the San Francisco, Chicago, New York and Atlanta regions in the event that the Company decides to expand and provide the services provided by the Regional Network in other regions across the U.S. To date, the four new wholly-owned subsidiaries have not engaged in any business activities, nor does the Company have any present intention to launch their activities. There can be no assurance that the results predicted with respect to the Regional Network will be realized, or if realized, will generate significant revenues for the Company. The Company, its licensees or joint venture partners must produce and/or provide individualized programming for the Company to continue commercial entertainment operations in the U.S. For the most part, the Company, its licensees and joint venture partners are dependent upon third parties as sources for the linear programming that is to be enhanced into ACTV Programming. For the entertainment market, all programming to date has been produced either through LGV or by the Company itself. With respect to the education market, the Company has executed non-exclusive agreements with seven entities to obtain linear programming that it can enhance to create ACTV Programs. Linear programs are standard television programs that can be viewed only as created and do not offer the viewer the option to make choices as to the content of the program or to respond to the program in an individualized way. The Company has entered into agreements with Turner Educational Services, Inc., Phoenix Learning Group, Bergwall Productions, Inc., The Hasty Pudding Puppet Co., AIMS Media, Agency for Instructional Technology ("AIT") and Takeoff/Video Educational Excellence. Each of these agreements gives ACTV worldwide, perpetual marketing rights (except for the AIT agreement, which limits the rights to 15 years) to the programming produced. The companies 43 are to receive quarterly royalties, based on the number of units of ACTV Programs sold. There can be no assurance that the Company will be successful in reaching agreements with licensees and joint venture partners, that the Company's strategy of marketing the Programming Technology through its licensees and joint venture partners will be successful, or that the methods that its licensees and joint venture partners choose to market the Programming Technology will be successful. Further, the Company may be adversely affected by the financial and business considerations of its licensees and joint venture partners. Future joint venture and license agreements may provide that the licensees and joint venture partners will receive equity interest in the Company and/or its subsidiaries. Set-Top Converters, Terminals, and Other Interactive Devices The Company does not intend to manufacture set-top converters, terminals, video servers, or other interactive devices. In the entertainment market, ACTV signed, on June 8, 1993, a 20-year, non-exclusive, royalty-free manufacturing license with LGV. Today, the Videoway terminal manufactured through LGV is the only ACTV-compatible set-top converter available to potential distributors of ACTV Programming. The Company intends to grant licensees similar to the one granted to LGV to other manufacturers that are selected by the future distributors of ACTV Programming. ACTV's Programming Technology can work with different modes of transmission (cable, DBS, broadcast, and MMDS), and is compatible with commonly available one-way, analog systems. In addition, it is compatible with the newer digital systems that are just starting to be deployed. Therefore, there are many ways to design a distribution system that is compatible with ACTV's Programming functionality. The Company believes that the incremental cost of adding ACTV Programming functionality will not be significant in digital systems. There can be no assurance that the Company will be successful in developing additional manufacturing licenses. In the education market, the Company entered into an arrangement in March 1995, with General Instrument Corporation ("GI") pursuant to which ACTV's Programming Technology for distance learning will be integrated with GI's DigiCipher system. The DigiCipher is a digital decoder used by many distance learning networks that distribute their television signal digitally and require that the signal be decoded at their downlink sites. The new digital system will be called "DigiCipher/ACTV Distance Learning System," and will allow programming networks to develop individualized programming and distribute it digitally to their customers. Under the arrangement, the companies will cooperate technically, each paying their own costs, and GI would receive any revenues generated from the DigiCipher decoder while the Company would receive any revenues generated from the digital learning unit. At present, the Company and GI's concerted research and technical work toward the development of the new digital system is in its initial stage and will take most of 1996 to complete. There can be no assurance that the new digital system will be developed, or if developed, that it will generate significant revenues for the Company. 44 The Company executed a non-exclusive agreement in June 1992 with KDI Precision Products, Inc. ("KDI") to manufacture ACTV's classroom and distance learning systems, with compatible ACTV Programming functionality. KDI sells the systems to ACTV at prices and in accordance with a delivery schedule agreed upon from time to time. KDI also is a distributor of components such as television monitors, VCRs, remote controls, printers and cabinets used in conjunction with the systems. The agreement is subject to automatic renewal for additional one-year terms unless terminated by either party on six-months' written notice. KDI is currently the only manufacturer of the classroom and distance learning systems. The Company believes that KDI can produce sufficient systems to meet the anticipated needs of ACTV in the education marketplace. In the event that KDI were unable to supply the systems, there can be no assurance that the Company could produce sufficient systems or obtain sufficient systems from another manufacturer at an acceptable price. The inability of ACTV to obtain systems would have a material adverse affect on the business of the Company. Consolidation of Educational Partnership into ACTV On July 14, 1992, ACTV Interactive, Inc. entered into a partnership agreement with Post-Newsweek Education, Inc., a wholly-owned subsidiary of the Post Company, pursuant to which ACTV Interactive was formed as a Delaware general partnership, for the purpose of selling products and services incorporating the ACTV Programming Technology to the education market. The Post Company received a 51% interest in ACTV Interactive; ACTV Interactive, Inc., a wholly-owned subsidiary of the Company, received a 49% interest in ACTV Interactive. In connection with the formation of the partnership, the Company entered into a license agreement (the "License Agreement") with ACTV Interactive. Pursuant to the License Agreement, ACTV Interactive was given licenses to exploit certain of the Company's patents and related technology (collectively the "Patents") in the creation and distribution of educational programming. The License Agreement provided that the Company receive five percent (5%) of all revenues generated by ACTV Interactive. On March 11, 1994, the Company purchased the Post Company's full 51% interest in ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million in cash at closing and a $2 million promissory note. This note was paid in full in October 1995. The consideration paid by the Company for the Post Company's full 51% interest in ACTV Interactive was determined after arms-length negotiations between the parties. The Company and the Post Company agreed to the amount of such consideration without receiving a valuation from a disinterested third party. Reorganization of ACTV Entertainment and the LGV Agreements In March 1988, the Company formed ACTV Entertainment as equal stockholders with a subsidiary of LGV, Videotron Technologies Ltd. The Company granted to ACTV Entertainment the exclusive right to use the Company's Programming Technology in the United States DBS, cable and broadcast television markets. 45 On June 8, 1993, LGV withdrew from its ownership in ACTV Entertainment, and the Company became the sole shareholder in ACTV Entertainment under the terms of an agreement with the subsidiary of LGV, thereby settling all outstanding legal disputes between the companies. While ACTV gained full ownership and control of ACTV Entertainment in the settlement, it did agree to give up the royalty income it was receiving from its Videoway terminal license with LGV for Canada and Europe ($3.00 per user per year). Simultaneously with the June 8, 1993 change in ownership of ACTV Entertainment, the 1987 LGV exclusive foreign license for Canada, Europe and the Soviet Union was renegotiated. The new license provides LGV with a 20-year, non-exclusive, royalty-free license to manufacture its Videoway terminal with compatible ACTV Programming functionality. Videoway is a cable converter box capable of providing a variety of advanced services, including standard cable tuning and decoding capabilities, access to videotext, closed-captioning, data banks, video games, software downloading and electronic mail. LGV has informed the Company that it has installed Videoway converter boxes in approximately 240,000 homes in Canada. In addition, the new modified license agreement allows LGV to produce ACTV Programming for a certain number of potential Videoway subscribers in the United States, Canada and in selected European countries. The license is limited to the condition that neither LGV nor its sublicensees receive any royalty or other fees with respect to ACTV Programming, except for promotion and direct production expenses paid by LGV. Any royalties or profits from third party programmers will be paid exclusively to ACTV. Patents, Applications, and Proprietary Technology The Company has sought to protect the proprietary features of the Programming Technology it employs through patents, copyrights, confidentiality agreements, and trade secrets both in the United States and overseas. As of the present time, the United States Patent and Trademark Office has issued nine patents, with five additional patents pending, three of which name Dr. Michael Freeman, the Company's Advanced Product Development Liaison, as an inventor thereof, and two of which name Dr. Freeman and Gregory Harper, former President -- Technology Consulting Group, and one of which names Richard Bennett, who is not affiliated with the Company, as inventors thereof. The patents, which deal with different aspects of the ACTV Programming Technology, expire at various dates from 1998 to 2009. Corresponding patents for some of the above U.S. patents have been granted or are pending in Canada, Japan, Australia and the European Patent Office. When a patent is granted by the European Patent Office, and upon the filing of appropriate translations, protection will be available in the designated European countries. The Company believes such patents will strengthen its competitive position in the aforementioned countries. Dr. Freeman, Mr. Harper and Mr. Bennett have assigned to the Company all right, title, and interest in and to the above US patents and any corresponding foreign patents or applications based thereon. In addition, Dr. Freeman has agreed to assign to the Company the rights and title in and to all future patents and applications, and any corresponding foreign patents or application relating to the ACTV Programming Technology. 46 There can be no assurance that the patents held by the Company are enforceable, particularly in view of the high cost of patent litigation, nor can there be any assurance that the Company will derive any competitive advantages therefrom. To the extent that patents are not issued for any other products developed by the Company, the Company would be subject to more competition. The issuance of patents may be insufficient to prevent competitors from essentially duplicating the Company's products by designing around the patented aspects. In addition, there can be no assurance that the Company's products will not infringe on patents owned by others, licenses to which may not be available to the Company, nor that competitors will not develop functionally similar products outside the protection of any patents the Company has or may obtain. The Company requires each of its employees, consultants and advisors to execute a confidentiality and assignment of proprietary rights agreement upon the commencement of employment or a consulting relationship with the Company. These arrangements generally provide that all inventions, ideas, and improvements made or conceived by the individual arising out of the employment or consulting relationship shall be the exclusive property of the Company. This information shall be kept confidential and not disclosed to third parties, except by consent of the Company or in other specified circumstances. There can be no assurance, however, that these agreements will provide effective protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. Competition The development of interactive television applications is highly competitive. The Company competes within the television industry with many other applications which may be considered interactive. Moreover, the Company also competes with other forms of entertainment and educational programming, many of which are much more established, including standard television programming and the rapidly growing CD-ROM market. Among the Company's competitors in both the area of interactive television and in other media are companies that have greater financial, technical and marketing resources than the Company. At the present time, there are a number of different interactive television applications that have been developed or are under development by others which might be considered to be competitive with the Company's Programming Technology. These other interactive applications in general are delivered via cable television, or through play-along devices that are attached to the television. To the best of the Company's knowledge, none of the point to multi-point systems based on these technologies allow the viewer to affect what is seen on the television in the same manner or to the extent of the ACTV Programming Technology. The new interactive television applications principally fit in six primary categories: (1) information and channel guide services, (2) transactional services, (3) quantity/video-on-demand, (4) separate device play-along, (5) video games and (6) individualized TV. ACTV fits in the individualized TV category. Only individualized television allows every television viewer to interact personally with and change the TV program itself. Within the limits of the programmed choices, each sports fan can watch the action the way he or she chooses, and each child receives individual instructions based on his or her own response to the on-screen 47 teacher. Individualized television technology is the only technology that uses traditional filmed entertainment where the program itself is interactive. ACTV's process of creating individualized television programming involves viewer selection from a multiple number of frame-synchronized video, graphics, and/or audio signals delivered at one time. The viewer sees and/or hears only one of the signals at a given moment; the other signals are transparent. Using a remote control, the viewer interacts with the television by making selections or decisions called for by the specially-prepared programming. Based on a viewer's inputs, the ACTV Programming Technology, which uses a microprocessor, automatically switches at pre-determined intervals between various segments of the multiple signals. The viewer cannot detect when such a switch takes place because it occurs instantly and with frame accuracy. The results appear seamless and uninterrupted -- for the viewer the programming is completely individualized. Although an individualized program and its associated branches are taped in a normal linear fashion, the program, when shown, has thousands of possible segment combinations available for each viewer to experience. The particular version one sees is based on individually selected preferences and inputs. An unlimited number of independent viewers can interact with an ACTV Program simultaneously. See "ACTV Programming Technology." A summary of each of the other interactive application follows: 1) Information and Channel Guide Services--This form of interactivity enables the television to serve as a tool for information accessibility and retrieval. The most immediate application is for channel guide services, which allow viewers to easily determine the locations of programs in an expanded channel universe. Information services include access to large external text and graphic information databases, such as those provided by America On-Line and Prodigy. 2) Transactional Services--This application allows the television viewer to purchase merchandise displayed on-screen by pressing a button on his or her remote control. Transactional services could be in the form of a home shopping program or an addendum to a commercial. Through their television sets, viewers may receive video, still pictures, text or audio about the selected products. 3) Quantity/Video on Demand--Cable, DBS and MMDS systems that incorporate digital television delivery will be able to offer substantially more channels than their analog predecessors. Programs transmitted digitally can be randomly accessed through menu selection items. Extensive pay-per-view movies could be made available, popular shows might be aired at many different starting times, and the viewer could purchase, on an a la carte basis, television shows following their initial air date on broadcast or cable TV. 4) Separate Device Play-Along--This application allows viewers to play along with television programs such as game shows or sporting events. The viewer has a separate controller that receives information about the show in progress, and either displays it on the controller itself, or overlays television pictures with text and/or graphics. Players can compete with the on-screen contestants for prizes. Although the TV programming itself is unchanged, game players at home see their results displayed on the play-along device's screen. 48 5) Video Games--Interactive television services will allow a user to call up video games, like those now marketed by Nintendo and Sega, through the cable TV box. Historically, video games have been delivered on cartridges inserted into special-purpose terminals attached to a television set. Since the Company's business strategy depends in large part on its ability to attract joint venture partners and/or licensees, the Programming Technology must be more appealing to potential joint venture partners or licensees than other technologies which currently exist or are now under development or may be developed in the future. Employees At December 31, 1995, the Company, employed 24 full-time employees; the Company believes that its relationships with its employees are generally satisfactory. Property The Company and its subsidiaries maintain their principal and executive offices at Rockefeller Center, 1270 Avenue of the Americas, New York, New York, where they lease approximately 4,000 square feet at a rent of approximately $11,000 per month pursuant to a lease that expires in April 1996. The Company is planning to extend its lease for five years, and to include an additional 1,500 square feet to its current space, for a monthly rent of approximately $17,400. The Company maintains an engineering staff and an editing studio at 1600 Broadway, New York, New York where it leases approximately 2,500 square feet at a rent of $3,450 per month, pursuant to a lease that expires in December 1999. The lease agreement provides for cancellation by either party with no penalty at the end of 1996. In addition, the Company maintains offices at 9454 Wilshire Boulevard, Beverly Hills, California, for The Los Angeles Individualized Television Network, Inc. which it leases on a month-to-month basis for approximately $1,350 per month. The Company believes its current facilities are suitable and adequate, and provide the productive capacity necessary for the performance of the operations of the Company. None of the Company's properties are leased from affiliated persons. Legal Proceedings In March 1988, LGV and the Company formed ACTV Entertainment, in which they were to be equal stockholders, each owning 50 shares of Common Stock. The parties also entered into a license agreement regarding the use of the Programming Technology by LGV in Canada, Europe and the Soviet Union. LGV had pledged 28.5 of its shares to secure two $4,000,000 payments it was to have made upon the occurrence of certain conditions. The parties had a dispute as to whether such conditions had been met, the payments were not made, and ACTV foreclosed on the 28.5 shares. An arbitration was commenced and subsequently stayed, pending settlement discussions between the parties. On June 8, 1993, the parties reached a settlement pursuant to which ACTV became the sole stockholder of ACTV Entertainment and the license agreement between the parties was modified. See "-- Reorganization of ACTV Entertainment and the LGV Agreements." 49 In August, 1993, a lawsuit was commenced against the Company by Nolan Bushnell in the United States District Court for the Southern District of New York, seeking damages in the amount of $290,872, plus interest on such amount from April 1986, arising out of an alleged payment by plaintiff of a guaranty of an equipment lease of the Company. On April 25, 1994 the Company entered into a Settlement Agreement with Nolan Bushnell and Catalyst Technologies, a sole proprietorship owned by Mr. Bushnell, pursuant to which (a) the lawsuit commenced by Mr. Bushnell in connection with his guaranty of an equipment lease ($290,872) was withdrawn, and (b) Mr. Bushnell and Catalyst Technologies relinquished any and all right to receive payments from the Company out of a repayment pool established pursuant to the terms of a 1985 agreement. The obligation to Mr. Bushnell and Catalyst under the 1985 agreement were reflected on the Company's books, as of December 31, 1993 at $121,333, plus accrued interest thereon. Pursuant to the terms of the Settlement Agreement, the Company paid $100,000 to Mr. Bushnell and issued a promissory note in the principal amount of $190,000, payable $100,000 on June 30, 1995 and $90,000 on June 30, 1996. Of the aggregate settlement amount, $255,000 was paid by the Company in settlement of Mr. Bushnell's claims in the lawsuit relating to his guaranty of the Company's equipment lease, and the balance of $35,000 is in full and final settlement of the claims of Mr. Bushnell and Catalyst Technologies for payments from the repayment pool. In January 1995, the Company prepaid the $190,000 Note in full for a discounted amount of $100,000 in full satisfaction of this obligation. There are no other pending material legal proceedings to which the Company is a party. 50 MANAGEMENT Executive Officers and Directors The Executive Officers and Directors of the Company are as follows:
Name Age Position with the Company - ---- --- ------------------------- William C. Samuels 53 Chairman, Chief Executive Officer, President and Director David Reese 38 Executive Vice-President, President -- ACTV Entertainment, Inc. and Director Bruce Crowley 38 Executive Vice-President, President -- ACTV Interactive, Inc. and Director Christopher C. Cline 45 Vice President, Chief Financial Officer and Secretary Jay M. Kaplowitz 49 Director Richard Hyman 43 Director Howard M. Squadron 68 Director
WILLIAM C. SAMUELS has served as President and a Director of the Company since August 1, 1989, and became the Chief Executive Officer in 1993 and Chairman of the Board in November 1994. He also served as Chairman of ACTV Interactive, a partnership with the Post Company, from July 1992 through March 1994, when the Company acquired the Post Company's interest in ACTV Interactive. Mr. Samuels is a trustee of the Howard J. Samuels Institute at City College. Mr. Samuels has a JD from Harvard Law School (1968) and a BS in Economics and Engineering from the Massachusetts Institute of Technology (1965). DAVID REESE has been Executive Vice President of the Company since November 1992 and has been President of ACTV Entertainment, Inc., a subsidiary of the Company ("ACTV Entertainment"), since November 1994. He has been employed by the Company since December 1988, and served as the Company's Vice President of Finance from September 1989 through November 1992. He has been a Director since 1992. Mr. Reese has a BS from Pennsylvania State University (1978). BRUCE CROWLEY joined the Company as President - Distance Learning in October 1994, became Executive Vice President in October, 1995, and became President of ACTV Interactive, Inc. and a Director of the Company in December, 1995. Prior thereto, he had been employed 51 by KDI Corporation since 1988, and was most recently responsible for KDI Corporation's education division. Mr. Crowley has a B.A. from Colgate University and an M.B.A. from Columbia University. CHRISTOPHER C. CLINE has been Vice President - Finance, and Chief Financial Officer of the Company since November 1993. From 1991 to 1993 he was employed by Showcase Communications Network, Ltd., a multi-media computer software and publishing company, first as Vice President -- Finance and later as President and Chief Executive Officer. From 1988 to 1990, Mr. Cline was Vice President of Intercontinental Trade and Finance Corp., a cross-border financial trading and consulting company. Mr. Cline received a BA from Haverford College (1973) and an MBA from Stanford University (1976). JAY M. KAPLOWITZ has been a Director of the Company since December 1988. Mr. Kaplowitz has for more than the past 20 years engaged in the practice of law in New York, New York. For the last 17 years, he has been a member of the law firm of Gersten, Savage, Kaplowitz & Curtin, LLP, general counsel to the Company. RICHARD HYMAN has been a Director since December 1994. For more than the past five years, he has been the President of Triquest Financial Services, Inc. Mr. Hyman received a BA from the University of Wisconsin (1974). HOWARD M. SQUADRON has been a Director since January 1995. He has been engaged in the practice of law for more than 40 years, since 1954, with the firm of Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin. Mr. Squadron received his BA from City College (1946) and his JD from Columbia University (1947). Executive officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors. All Directors hold office until the next annual meeting of stockholders or until their successors are elected and qualified. KEY EMPLOYEE MICHAEL J. FREEMAN, Ph.D. has been Advanced Product Development Liaison since November 1994. Prior thereto, he had been a Director and Chairman of the Board of Directors since June 1985. He is the inventor of the Programming Technology and the founder of the Company. Dr. Freeman devotes a substantial amount of his business time to the Company. Prior to his association with the Company, Dr. Freeman was involved in developing interactive products, principally in the toy and telecommunications industries. Dr. Freeman has a Ph.D. from City University of New York (1977) and an M.B.A. from Bernard Baruch College (1970). EMPLOYMENT AND CONSULTING AGREEMENTS The Company and Mr. Samuels entered into an employment agreement in August 1995. Mr. Samuels serves as Chairman of the Board, President and Chief Executive Officer of the Company. For the five-year term of the agreement, Mr. Samuels will be paid a minimum annual 52 salary of $190,000 and a bonus paid in cash and/or in unregistered securities equal to 2% of the increase over a twelve month period in the total market capitalization of the Company over fifty million dollars. Mr. Samuels' employment agreement contains non-competition provisions pursuant to which he agreed not to engage in a business that is competitive with the Company during the term of his employment agreement and for one year thereafter. Mr. Samuels currently holds fully vested options to purchase an aggregate of 533,035 shares of Common Stock at an exercise price of $2.50 per share, exercisable through various dates from August 1997 through June 2001. Upon the issuance of any stock dividends, stock splits or combinations, the number of shares issuable upon the exercise of options for 533,035 of such shares may be adjusted to avoid dilution. Options for 120,000 of such 533,035 shares may also be adjusted to avoid dilution from the issuance from August 1989 through July 1993 by the Company of any Common Stock (including Common Stock issued after July 1993 based on options granted during the August 1989 to July 1993 period) as a result of any financing, joint venture or other business transaction. In addition, Mr. Samuels has unvested options to purchase an aggregate of 525,000 shares of Common Stock at an exercise price of $3.25 per share, a third of which vest on January 1, 1997, 1998 and 1999, respectively, which options are exercisable through 2004. The Company has also issued to Mr. Samuels' 215,000 outstanding SARs. The Company and Mr. Reese entered into an employment agreement on August 1995. For the five year term of the agreement, Mr. Reese will be paid a minimum annual base salary of $150,000. Mr. Reese's employment agreement contains non-competition provisions pursuant to which he agreed not to engage in a business that is competitive with the Company during the term of his employment agreement and for one year thereafter. The Company has granted Mr. Reese fully vested options to purchase 49,683 shares of Common Stock at an exercise price of $2.50 per share, which options are exercisable through March 1997. The Company has also granted Mr. Reese fully vested options to purchase 55,317 shares of Common Stock at an exercise price of $3.50 per share, which options are exercisable through January 2002. In addition, Mr. Reese has unvested options to purchase an aggregate of 330,000 shares of Common Stock at an exercise price of $3.25 per share, a third of which vest on January 1, 1997, 1998 and 1999, respectively, which options are exercisable through 2004. The Company has also issued to Mr. Reese 94,000 outstanding SARs. The Company and Bruce Crowley entered into an employment agreement in December 1995. Mr. Crowley has agreed to serve at an annual base salary of $150,000. Mr. Crowley's employment agreement contains non-competition provisions pursuant to which he agreed not to engage in a business that is competitive with the Company during the term of his employment agreement and for one year thereafter. The Company has granted to Mr. Crowley options to purchase 100,000 shares of common stock at an exercise prices of $3.50, as well as 100,000 SARs. In addition, Mr. Crowley has unvested options to purchase an aggregate of 201,000 shares of Common Stock at an exercise price of $3.25 per share, a third of which vest on January 1, 1997, 1998 and 1999, respectively, which options are exercisable through 2004. Mr. Samuels', Mr. Reese's and Mr. Crowley's employment contracts contain a change of control provision whereby, in certain circumstances, including the possibility that a person other than the Washington Post Company becomes the owner of 30% or more of the outstanding 53 securities of the employer and they are not retained, they receive a bonus not to exceed 2.7 times the then current base salary and the exercise price on all options is reduced to $.10 per option. The Company and Michael J. Freeman entered into an employment agreement in November 1994, whereby Dr. Freeman agreed to serve as Advanced Product Development Liaison for a term of five years from the original date of the agreement. Dr. Freeman is paid at the rate of $167,500 per year. Dr. Freeman is required to devote as much time as he, in his discretion, deems necessary to discharge his duties. The employment agreement of Dr. Freeman contains non-competition provisions pursuant to which he agreed not to engage in a business that is competitive with the Company during the term of his employment agreement and for one year thereafter. At the time of issuance, all options to ACTV employees were granted at an exercise price equal to or greater than the prevailing market price for the Company's Common Stock. AGREEMENTS WITH MANAGEMENT In June 1985, a group of investors, including Dr. Freeman, engaged in a restructuring of the Company and the purchase of the shares of certain previous investors. In connection with such restructuring, the Company obligated itself to repay certain creditors, out of a repayment pool ("Repayment Pool") to be funded with 10% of the Company's available cash flow in excess of $1,000,000 in any calendar year. Available cash flow is the excess of gross revenues. As of December 31, 1993, the aggregate amount of principal and interest due such creditors was approximately $709,794. During 1994, the Company extinguished all outstanding obligations under the Repayment Pool by paying cash, and in three cases issuing promissory notes, in separately negotiated settlement agreements with the holders of the obligations. The three notes, issued to Nolan Bushnell, Prudential Bache Securities, Inc., and Dr. Freeman, in the original principal amounts of $190,000, $25,000 and $8,770, respectively, were also repaid during 1994, at either their original principal amount, or at a discounted amount. The settlement price in all these agreements was approximately 18% of the obligations' face value. 54 SUMMARY COMPENSATION TABLE The following table sets forth all cash compensation for services rendered in all capacities to the Company, its subsidiaries and ACTV Interactive for the fiscal years ended December 31, 1994, December 31, 1993, and December 31, 1992 paid to the Company's Chief Executive Officer, the four other most highly compensated executive officers (the "Named Executive Officers") at the end of the above fiscal years whose compensation exceeded $100,000 per annum, and up to two persons whose compensation exceeded $100,000 during the above fiscal years, although they were not executive officers at the end of such years.
Restricted All Others Name and Principal Stock Compen- Position Year Salary Bonus Awards Options/SARs sation - ---------------------------------------------------------------------------------------------------- William C. Samuels 1994 $150,000 $25,000 80,000/100,000 $4,320 President, Chief 1993 $150,000 152,948/0 Executive Officer(1) 1992 $140,469 $21,037 120,000/160,000 Michael J. Freeman 1994 $162,500 $2,610 Ph.D, Chairman of the 1993 $162,500 Board(2) 1992 $156,250 $18,620 0/160,000 David Reese 1994 $123,078 $15,000 40,000/30,000 $990 President, ACTV 1993 $100,000 15,317/0 Entertainment(3) 1992 $103,923 24,000/80,000 Gregory Harper 1994 $126,923 $32,211 President, Technology(4) 1993 1992 Bruce Crowley 1994 $69,231 100,000/100,000 $55,000 President, Distance 1993 Learning(5) 1992 John Lack 1994 President(6) 1993 1992 $103,365 100,000/0
(1) Mr. Samuels has been Chief Executive Officer of the Company since 1993 and Chairman of the Board since November 1994; he has served as a President of the Company since 1989. (2) Dr. Freeman was Chairman of the Board of Directors until November 1994, and was Chief Executive Officer of the Company from 1985 to 1993. (3) Mr. Reese has been the Company's Executive Vice President since November 1992 and the President of ACTV Entertainment since November 1994. Prior thereto he was the Company's Vice President of Finance from September 1989 through November 1992. 55 (4) Mr. Harper served as the President of Technology for the Company from November 1993 to November 3, 1994. (5) Mr. Crowley has been the President, Distance Learning since October 1994. Prior thereto during 1994, Mr. Crowley performed consulting services for the Company for which he was paid $55,000. (6) Mr. Lack ceased service as a director and officer of the Company effective September 11, 1992. His compensation included $31,250 in consulting fees paid after the cessation of his employment. Mr. Lack was awarded 400,000 options in 1991 that did not vest. He received 100,000 options in 1992, all of which were exercised in 1993. OPTIONS AND STOCK APPRECIATION RIGHTS TO OFFICERS AND DIRECTORS The following tables set forth certain information with respect to all outstanding stock options and SARs granted or issued during 1994 to the Company's Named Executive Officers and Directors. SAR GRANTS
Potential Realizable Value at Assumed Annual Rates of % of Total Stock Price Number SARs Granted Exercise Appreciation for of SARs to Employees Price Expiration Option Term Name of Holders Granted in Fiscal Year ($/Share) Date 5% ($) 10% ($) - --------------- ------- -------------- ---------- ---- ------------------- William C. Samuels (1) 100,000 43.48% $5.50 8/31/04 $223,905 $521,794 David Reese (2) 30,000 13.04% $5.50 8/31/04 $67,172 $156,538 Bruce Crowley 100,000 43.48% $5.50 6/30/04 $223,905 $521,794
OPTION GRANTS
Potential Realizable Value at Assumed Annual Rates of % of Total Stock Price Number Options Granted Exercise Appreciation for of Options to Employees Price Expiration Option Term Name of Holders Granted in Fiscal Year ($/Share) Date 5% ($) 10% ($) - --------------- ------- -------------- ---------- ---- ------------------- William C. Samuels 80,000 33.33% $5.50 1/1/02 $162,840 $379,487 David Reese 40,000 16.67% $5.50 1/1/02 $81,420 $189,743 Bruce Crowley 100,000 41.67% $5.50 7/1/99 $203,550 $474,359 56 AGGREGATE OPTION/SAR EXERCISES IN LAST YEAR AND FISCAL YEAR-END OPTION/SAR VALUES(1)
Value of Number of Unexercised Unexercised In-the-Money Options/SARs Options/SARs Shares at FY-End at FY-End Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized Unexercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------------- Michael Freeman, Ph.D. 64,000/96,000 SARs $136,000/$204,000 0/0 Options $0/$0 William C. Samuels(2) 20,000 $50,000 32,000/196,000 SARs $68,000/$204,000 532,948/80,000 Options $599,567/$0 David Reese 32,000/78,000 SARs $68,000/$102,000 49,683/15,317 Options $73,125/$0 Bruce Crowley 0/100,000 SARs $0/$0 0/100,000 Options $0/$0 Gregory Harper 26,000/0 SARs $25,500/$0 94,000/0 Options $38,250/$0
(1) The closing bid price of a share of the Company's Common Stock at December 31, 1994, was $3 5/8. The base price of all in-the-money SARs was $1.50 and the exercise price of all in-the-money options was $2.50 (2) Mr. Samuels currently owns 20,000 shares issued to him upon the exercise of such options and exercised 32,000 SARs for cash proceeds of $112,000 during the fiscal year ended December 31, 1994. BOARD COMPENSATION REPORT Executive Compensation Policy The Company's executive compensation policy is designed to attract, motivate, reward and retain the key executive talent necessary to achieve the Company's business objectives and contribute to the long-term success of the Company. In order to meet these goals, the Company's compensation policy for its executive officers focuses primarily on determining appropriate salary levels and providing long-term stock-based incentives. To a lesser extent, the Company's compensation policy also contemplated performance-based cash bonuses. The Company's compensation principles for the Chief Executive Officer are identical to those of the Company's other executive officers. Cash Compensation. In determining its recommendations for adjustments to officers' base salaries for fiscal 1995, the Company focused primarily on the scope of each officer's 57 responsibilities, each officer's contributions to the Company's success in moving toward its long-term goals during the fiscal year, the accomplishment of goals set by the officer and approved by the Board for that year, the Company's assessment of the quality of services rendered by the officer, comparison with compensation for officers of comparable companies and an appraisal of the Company's financial position. In certain situations, relating primarily to the completion of important transactions or developments, the Company may also pay cash bonuses, the amount of which will be determined based on the contribution of the officer and the benefit to the Company of the transaction or development. Equity Compensation. The grant of stock options and stock appreciation rights to executive officers constitutes an important element of long-term compensation for the executive officers. The grant of stock options and stock appreciation rights increases management's equity ownership in the Company with the goal of ensuring that the interests of management remain closely aligned with those of the Company's stockholders. The Board believes that stock options and stock appreciation rights in the Company provide a direct link between executive compensation and stockholder value. By attaching vesting requirements, stock options and stock appreciation rights also create an incentive for executive officers to remain with the Company for the long term. See "Stock Option Plan" and "Stock Appreciation Rights Plan." Chief Executive Officer Compensation As indicated above, the factors and criteria upon which the compensation of William C. Samuels, the Chief Executive Officer, is based are identical to the criteria used in evaluating the compensation packages of the other executive officers of the Company. The Chief Executive Officer's individual contributions to the Company included his leadership role in establishing and retaining a strong management team, developing and implementing the Company's business plans and attracting investment capital to the Company. In addition, the Company reviewed compensation levels of chief executive officers at comparable companies within the Company's industry. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company did not have a compensation committee during the past fiscal year and all determinations concerning executive compensation for such period for the Company's executive officers were made by the Board of Directors. The Directors abstained from participation in compensation determinations concerning their own compensation. None of the executive officers of the Company has served on the Board of Directors or on the compensation committee of any other entity, any of whose officers served on the Board of Directors of the Company. 58 CORPORATE PERFORMANCE GRAPH [The graph shows a comparison of cumulative total stockholder returns from the effective date of the initial public offering of the Company's Common Stock on May 4, 1990 through December 31, 1994 for the Company, the NASDAQ Stock Market-U.S. and the Hambrecht & Quist Technology Index. The graph assumes that the value of the investment in the Company's Common Stock, the NASDAQ Stock Market ("NASDAQ") and Hambrecht & Quist Technology Index ("H&Q") was $100 on May 4, 1990 and that all dividends were reinvested. No dividends have been declared or paid on the Company's Common Stock. In December 1990, the cumulative total stockholder returns for such investment in the Company, NASDAQ and H&Q were approximately $40, $90 and $90, respectively; in December 1991: $20, $140 and $130, respectively; in December 1992: $40, $165 and $150, respectively; in December 1993: $125, $190 and $160, respectively; and In December 1994: $60, $190 and $190, respectively.] OTHER COMPENSATION Outside Directors may be paid an honorarium for attending meetings of the Board of Directors of the Company, in an amount that management anticipates will not exceed $500 per meeting. 59 STOCK OPTIONS AND STOCK APPRECIATION RIGHTS STOCK OPTION PLAN In December 1986, the Board of Directors approved a stock option plan (the "1986 Plan") that provided for the granting of 24,435 stock options to employees, consultants, officers and directors, as selected by the Board of Directors. As of December 31, 1991, options for 11,413 shares had been granted to eight employees with exercise prices from $0.01 to $8.185 under the 1986 Plan. No further shares are to be granted under the 1986 Plan, since the 1986 Plan has been canceled. By December 31, 1994, all options granted under this plan had been exercised or had expired. On August 9, 1989, the Board of Directors approved a 1989 Employee Incentive Stock Option Plan and a 1989 Non-Qualified Stock Option Plan (collectively, the "Plans") and on October 20, 1989, the stockholders authorized and approved the adoption of the Plans. Michael J. Freeman is not eligible to participate in either Plan. The 1989 Employee Incentive Stock Option Plan, which is administered by the Board of Directors, provides for the issuance of up to an aggregate of 100,000 shares of Common Stock upon exercise of options granted to key employees. This Plan stipulates that the option price may not be less than fair market value on the date of the grant and, from May 4, 1990, through May 4, 1992, could not be less than $5.50 per share. Options granted under this Plan shall not be exercisable for a period longer than ten (10) years from the date of the grant. The Plan generally provides that at the time of exercise of any option the purchase price must be delivered in cash, or at the option of the Board of Directors, or a committee designated by the Board to administer the Plan (the "Committee"), through delivery of the Company's Common Stock equal in value to the option exercise price, or by a combination thereof. Options under this Plan may be issued as "Incentive Stock Options" under Federal tax laws. As of December 31, 1994, 100,000 options had been granted under this Plan at exercise prices of $2.50 to $5.50 per share, which options expire between the years 2000 and 2002. During 1994, 9,500 options under the Plan were exercised. The 1989 Non-qualified Stock Option Plan, which is administered by the Board of Directors, provides for the issuance of up to an aggregate of 100,000 shares of Common Stock upon exercise of options granted to employees, officers, directors, consultants and independent contractors. This Plan provides that the Board has the discretion to establish the option exercise price, and that the option exercise price may be less than fair market value at the time of the grant of the option. However, a further provision is that from May 4, 1990 through May 4, 1992, no options could be granted having an exercise price that was less than the higher of the then current market price of the Company's Common Stock or $5.50 per share. Options granted under this Plan shall expire on a date determined by the Board or the Committee, but in no event later than three months after the termination of employment or retainer. This Plan generally provides that the purchase price must be delivered in cash, or if permitted by the Board or the Committee, services rendered or by a combination thereof. As of December 31, 1994, 100,000 options had been granted under this plan at exercise prices of $2.50 to $5.50 per share, which options expire between the years 2000 and 2002. During 1994, 23,000 options under the Plan were exercised. 60 As of December 31, 1994, the Company had issued options to purchase shares of Common Stock at varying prices, which options expire beginning in 1997 and are not part of the Plans. These include options to Mr. Samuels for 552,948 shares at $2.50 per share and 80,000 at $3.50 per share, to Mr. Reese for 49,683 shares at $2.50 per share and 40,000 at $3.50 per share, and to Mr. Crowley for 100,000 shares at $3.50 per share. As of December 31, 1994, Mr. Samuels has exercised options for 20,000 shares at $2.50 per share. STOCK APPRECIATION RIGHTS PLAN The Company's 1992 Stock Appreciation Rights Plan ("SAR Plan") was approved by the Company's stockholders in December 1992. The SAR Plan provides a means whereby employees, officers, directors, consultants and independent contractors may acquire the right to participate in the appreciation of the Common Stock of the Company pursuant to SARs. The SAR Plan is designed to promote the long-term interest of the Company and its stockholders by providing the recipients with an additional incentive to promote the financial success of the Company and its subsidiaries. Subject to adjustment as set forth in the SAR Plan, the aggregate number of SARs that may be granted shall not exceed 900,000. The SAR Plan is administered by the Stock Appreciation Rights Committee (the "SAR Committee"). SARs may not be exercised until the expiration of six months from the date of grant, and could in no event be exercised earlier than May 1, 1994. One-fifth of the SARs awarded to a recipient vest at the end of each 12-month period following the date of grant. If a holder of a SAR ceases to be an employee, director or consultant of the Company, or one of its subsidiaries or an affiliate, other than by reason of the holder's death or disability, any SARs that have not vested shall become void. Exercise of SARs also will be subject to such further restrictions (including limits on the time of exercise) as may be required to satisfy the requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission and any other applicable law or regulation (including, without limitation, federal and state securities laws and regulations). SARs are not transferable, except by will or under the laws of descent and distribution. Upon exercise of a SAR, the holder will receive for each share for which a SAR is exercised, as determined by the SAR Committee in its discretion, (a) shares of the Company's Common Stock, (b) cash, or (c) cash and shares of Common Stock, equal to the difference between (i) the fair market value per share of the Common Stock on the date of exercise of the SAR and (ii) the value of a SAR, which amount shall be no less than the fair market value per share of Common Stock on the date of grant of the SAR. A grant of SARs has no Federal income tax consequences at the time of such grant. Upon the exercise of SARs, the amount of any cash and, generally, the fair market value of any shares of Common Stock received, is taxable to the holder as ordinary income; the Company will have a corresponding deduction. Upon the sale of any Common Stock acquired by the exercise of SARs, holders will realize long-term or short-term capital gains or losses, depending upon their holding period for such Common Stock. Under the Company's SAR Plan, as of December 31, 1994, the Company had granted a total of 726,000 SARs, including 260,000 to William Samuels, 110,000 to David Reese and 100,000 to Bruce Crowley. The initial price of 482,000 of the 716,000 SARs issued (including 160,000 61 to Mr. Samuels and 80,000 to Mr. Reese) was $1.50 per share and the initial price of the remaining 244,000 SARs issued (including 100,000 to Mr. Samuels, 30,000 to Mr. Reese and 100,000 to Mr. Crowley) was $5.50 per share. The initial prices of all the SARs granted were equal to the fair market value of a share of Common Stock on the respective dates of grants. During 1994, Mr. Samuels exercised 32,000 SARs and received cash proceeds of $112,000. The SARs expire between 1998 and 2004; one-fifth of the total SARs granted to each recipient vest at the end of each 12 month period following the date of grant. 62 CERTAIN TRANSACTIONS On March 17, 1992, the Post Company acquired an 8% Convertible Promissory Note of the Company in the principal amount of $1,500,000 (the "Convertible Note") and, in connection therewith, acquired 720,000 unregistered shares of Common Stock. The principal amount of the Convertible Note was payable in four installments of $375,000, together with accrued interest thereon, on March 15, 1994, September 15, 1994, March 15, 1995, and September 15, 1995. The purpose of this transaction was to provide working capital to the Company. On March 15, 1994, the unpaid principal and accrued and unpaid interest on the Convertible Note were converted into 871,334 shares of Common Stock of the Company at $2.00 per share. On March 11, 1994, the Post Company entered into a voting agreement with the Company and William C. Samuels, Chief Executive Officer of the Company as voting trustee ("Voting Trustee"), pursuant to which the Post Company has assigned to Mr. Samuels its voting rights with respect to the Company's Common Stock that it holds. This voting trust remains in effect for 10 years, or as long as the Post Company's shareholdings in the Company are greater than 20% or less than 51% of outstanding Common Stock. The Post Company also regains the right to vote its shares of Common Stock under certain circumstances, including the proposal of any amendment to the Company's certificate of incorporation requiring stockholder approval; in case of any reclassification or change of the outstanding Common Stock of the Company, any consolidation of the Company with, or merger of the Company into, another corporation, or in the case of a sale or conveyance to another corporation or other entity of all or substantially all of the property, assets or business of the Company; upon the commencement of a proxy contest regarding the Company's Board of Directors; if a person or entity acquires 20% or more of the outstanding Common Stock of the Company; or if a conflict of interest (as determined by the Post Company in its sole discretion) involving the Voting Trustee or any successor Voting Trustee should arise. On March 17, 1992, effective with the formation of ACTV Interactive, the Post Company acquired an option (the "Option") pursuant to an option agreement (the "Option Agreement") to purchase an additional 750,000 shares of the Company's Common Stock at $2.00 per share, or $2.50 per share if exercised after March 15, 1994. On March 15, 1994, the Post Company exercised this Option, receiving 750,000 shares at $2.00 per share. On such date, the average of the high bid and ask prices of the Company's Common Stock was $5 7/8. The Post Company also obtained pursuant to the Option Agreement certain "piggyback" and demand registration rights with respect to the 720,000 shares of Common Stock that it purchased in 1992 and the shares of Common Stock that it received upon exercise of the Option and conversion of the Convertible Note. In connection with the Option Agreement, the Post Company also received the right to purchase, from the Company, at a fair market exercise price to be determined, an amount of shares of Common Stock necessary to increase the Post Company's percentage ownership of the total then outstanding shares of Common Stock to 51%. Such right is exercisable through March 17, 1997, subject to extension in certain circumstances. Until March 17, 1995, the Post Company agreed not to acquire more than 40% of the Company unless certain events occurred, such as a tender offer, a proxy contest, or the acquisition by a 63 third party of in excess of 15% of the Company's Common Stock, as set forth in a standstill agreement between the Company and the Post Company (the "Standstill Agreement"). On July 14, 1992, the Post Company and the Company formed ACTV Interactive to market the Company's Programming Technology for educational applications world-wide. The Post Company invested $2.5 million and owned 51% of ACTV Interactive. ACTV Interactive, Inc., a wholly owned subsidiary of the Company, owned a 49% interest in ACTV Interactive. In connection with the formation of ACTV Interactive, the Company entered into a license agreement (the "License Agreement") with the partnership, pursuant to which ACTV Interactive was given a license to exploit the Programming Technology in the creation and distribution of educational programming. The License Agreement provided for the Company to receive a five percent (5%) royalty on certain revenues generated by ACTV Interactive, subject to certain adjustments. On March 11, 1994, the Company purchased the Post Company's entire 51% interest in ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million in cash at closing and a $2 million note due December 31, 1996 (the "New Note"). The New Note accrued interest at 8%. The principal of the New Note was secured pursuant to a security agreement through which the Post Company acquired a security interest in and lien with respect to all of the Company's existing United States patents and pending applications. The New Note was paid in full by October 1995. The consideration for the acquisition by ACTV of the Post Company's interest in ACTV Interactive was based on the value of the ACTV Programming it had developed for education, its marketing and sales of such programming, and the Company's assessment of the future value of the use of the Programming Technology in the education and distance learning markets. Jay M. Kaplowitz is a Director of the Company and a partner of Gersten, Savage, Kaplowitz & Curtin, LLP, general counsel to the Company. Mr. Kaplowitz owns 2,000 shares and his wife owns 22,500 shares of Common Stock of the Company. In addition, Mr. Kaplowitz owns options to purchase 25,000 shares at an exercise price of $3.50 per share. The options were issued to Mr. Kaplowitz pursuant to an option agreement dated January 1, 1989 that granted Mr. Kaplowitz registration rights with respect to such options. The 22,500 shares of Common Stock owned by Sheila Kaplowitz, his spouse, were issued in connection with the Company's March 17, 1992 loan financing with the Post Company. The Company agreed to pay a portion of outstanding legal fees due to Gersten, Savage, Kaplowitz & Curtin, LLP, counsel to the Company, which were accrued for legal services rendered in connection with the loan financing, by issuing shares of the Company's Common Stock. Upon verbal agreement between the Company and Mrs. Kaplowitz, the Company issued 22,500 shares to Mrs. Kaplowitz and granted Mrs. Kaplowitz registration rights with respect to such shares. Edward Curtin, a member of the firm Gersten, Savage, Kaplowitz & Curtin, LLP, owns 2,000 shares of Common Stock of the Company, and Jill Curtin, his spouse, also owns 2,000 shares of the Common Stock of the Company. All current transactions between the Company, and its officers, directors and principal stockholders or any affiliates thereof are, and in the future such transactions will be, on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 64 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of December 31, 1995 with respect to each beneficial owner of five percent (5%) or more of the outstanding shares of Common Stock of the Company, each director of the Company and all officers and directors as a group. The following table assumes the issuance of all shares of Common Stock being offered hereby and the exercise of all options and warrants for which the underlying shares of Common Stock are being registered pursuant to the Concurrent Prospectus and that the selling security holder under the Concurrent Prospectus does not subsequently sell any of such shares. The table does not include stock appreciation rights ("SARs"), nor does it include options that have not yet vested or are not exercisable within 60 days of the date hereof.
Percent of Name and Address Number of Percent of Class Class After of Beneficial Owner Shares Before Offering Offering - ------------------- ------ --------------- -------- William C. Samuels (1) 3,321,917 27.80% 1.82% ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 David Reese (2) 105,000 * * ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 Bruce Crowley (3) 66,000 * * ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 Jay M. Kaplowitz, Esq. (4) 27,000 * * Gersten, Savage, Kaplowitz & Curtin 575 Lexington Avenue New York, NY 10022 Richard Hyman 25,000 * * Triquest Financial Services 505 Park Avenue New York, NY 10022 Howard M. Squadron (5) 65,267 * * Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin 551 Fifth Avenue New York, NY 10176
65
Percent of Name and Address Number of Percent of Class Class After of Beneficial Owner Shares Before Offering Offering - ------------------- ------ --------------- -------- The Washington Post Company (6) 2,341,334 20.51% * 1150 15th Street, N.W. Washington, D.C. 20071 All Directors and Officers 3,672,163 29.98% 1.84% as a Group (7 persons) (1)(2)(3)(4)(5)(6)(7)
* Indicates Less than 1% of common shares outstanding (1) Includes (a) 240,950 shares of Common Stock owned by Mr. Samuels, (b) 533,035 shares of Common Stock issuable to Mr. Samuels upon the exercise of stock options, and (c) 2,341,334 shares of Common Stock owned by The Washington Post Company (the "Post Company") and 276,598 shares owned by Dr. Freeman, respectively, which are subject to voting agreements with Mr. Samuels. (2) Consists of 105,000 shares of Common Stock issuable to Mr. Reese upon the exercise of stock options. (3) Consists of 66,000 shares of Common Stock issuable to Mr. Crowley upon the exercise of stock options. (4) Includes 25,000 shares issuable upon the exercise of the options and does not include 22,500 shares owned by Mr. Kaplowitz's wife, of which he disclaims beneficial ownership. (5) Includes 50,000 shares issuable upon the exercise of stock options. (6) All of the Post Company's shares are subject to a voting agreement with Mr. Samuels. Does not include shares issuable upon the exercise of the right of the Post Company to purchase from the Company, at a fair market exercise price to be determined, the number of shares of Common Stock necessary (Currently 7,083,345 shares) to bring the Post Company's percentage ownership of the total then outstanding shares to 51%. See "CERTAIN TRANSACTIONS." At present, the Company does not have enough shares authorized to accommodate the Post Company should it choose to exercise such right. If the Post Company decides to exercise its right, the Company will seek to take the necessary action to fulfill its obligation. (7) Does not include shares that may be issued by the Company upon the exercise of SARs. 66 DESCRIPTION OF CAPITAL STOCK The total authorized capital stock of the Company consists of 17,000,000 shares of Common Stock, par value $0.10 per share, and 1,000,000 shares of Preferred Stock, par value $0.10 per share. The following descriptions of capital stock are qualified in all respects by reference to the Restated Certificate of Incorporation and By-Laws of the Company, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. Common Stock The holders of Common Stock will elect all directors and are entitled to one vote for each share held of record. As of the date of this Prospectus, 11,414,211 shares of Common Stock were issued and outstanding. All shares of Common Stock will participate equally in dividends, when and as declared by the Board of Directors and in net assets on liquidation. The shares of Common Stock will have no preference, conversion, exchange, preemptive or cumulative voting rights. Preferred Stock The Company is authorized by the Restated Certificate of Incorporation to issue up to 1,000,000 shares of Preferred Stock, par value $0.10 per share, designated as Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. The Company is authorized to issue up to 666,667 shares of Series A Convertible Preferred Stock and 333,333 Series B Convertible Preferred Stock. None of the shares of Preferred Stock are issued and outstanding. Holders of Preferred Stock will be entitled to voting rights equal to the number of shares of Common Stock into which their shares are convertible. The holders of Preferred Stock will be entitled to receive dividends, when and as declared by the Board of Directors, and will have priority over holders of Common Stock as to any declaration or payment of any dividend on the Common Stock. In the event of liquidation, dissolution or winding up of the Company, the holders of Preferred Stock will be entitled to receive a sum equal to the initial purchase price of the Preferred Stock prior to any distribution to the holders of Common Stock. The shares of Preferred Stock are convertible into the number of whole shares of Common Stock calculated by dividing (i) the number of shares of Preferred Stock multiplied by the initial conversion price of the shares of Preferred Stock being converted by (ii) the conversion price in effect at the time of conversion. Shares of Preferred Stock issued by the Board of Directors could be utilized, under certain circumstances, to make an attempt to gain control of the Company more difficult or time consuming. For example, shares of Preferred Stock could be issued with certain rights which might have the effect of diluting the percentage of shares of Common Stock owned by a significant stockholder or may result in the entrenchment of management. In addition, shares of Preferred Stock could be issued to purchasers who might side with management in opposing a takeover bid which the Board determines is not in the best interest of the Company and its stockholders. This provision, therefore, may be viewed as having possible anti-takeover effects. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. Although the Board of Directors does not contemplate that the issuance of shares of Preferred Stock will have the 67 effect of discouraging takeover proposals or similar transactions, and the Board of Directors does not contemplate issuing Preferred Stock for such purpose, the actual voting and conversion rights of such Preferred Stock could have such an effect. Warrants and Options On May 4, 1990, in connection with its initial public offering, the Company issued Redeemable Warrants in registered form pursuant to an agreement, dated May 4, 1990 (the "Warrant Agreement"), between the Company and Continental Stock Transfer & Trust Company. As a result of certain adjustments pursuant to the Warrant Agreement after May 4, 1990, as of May 7, 1993 one Redeemable Warrant represented the right of the registered holder to purchase one and three-tenths (1.3) shares of Common Stock at an exercise price of $4.48 per warrant until May 3, 1994, subject to adjustment. On April 7, 1993, the Company notified the holders of the Redeemable Warrants of its intention to redeem the Redeemable Warrants on May 7, 1993. The Redeemable Warrants were then required to be exercised prior to the close of business on or before May 6, 1993, and thereafter, the right to purchase the applicable shares of Common Stock was forfeited. A total of 1,507,236 shares were issued upon the exercise of Redeemable Warrants, and the Company received net proceeds of approximately $4,500,000 therefrom. Pursuant to an agreement between the Company and Josephthal, Lyon & Ross Incorporated (the "Underwriter") in April 1993, (a) all of the holders of the 85,000 warrants issued to the Underwriter in connection with the Company's initial public offering in May 1990 (the "Underwriter's Warrants") relinquished such securities and (b) the Underwriter relinquished its right to receive the warrant solicitation fee of up to an aggregate of approximately $224,500 otherwise payable pursuant to the Warrant Agreement in exchange for warrants (the "1993 Warrants"), including (a) warrants to purchase 85,000 Redeemable Warrants at $.12 per Warrant exercisable at any time through April 30, 1995 (the "New A Warrants") and (b) warrants to purchase 110,500 shares of Common Stock at $.45 per share (the "New B Warrants"), exercisable during the period commencing after the earlier of (i) the sale of a holder's Redeemable Warrants, which were issuable pursuant to such holder's New A Warrants, to the public in the over-the-counter market or (ii) the exercise of such holder's Redeemable Warrants, which were issuable pursuant to such holder's New A Warrants, and terminating at 5:30 p.m. April 30, 1995. Each of the 85,000 Redeemable Warrants were identical to the Redeemable Warrants described above. The 85,000 Redeemable Warrants and the shares of Common Stock issuable upon exercise of the New B Warrants and such Redeemable Warrants were previously offered and sold pursuant to the Registration Statement of which the Concurrent Prospectus forms a part. In addition, the Company and the Underwriter executed a financial advisory and investment banking agreement in April 1993 pursuant to which the Underwriter agreed to provide financial advisory and investment banking services to the Company for two years, and the Company issued the Underwriter warrants to purchase 100,000 shares of Common Stock at $5.50 per share, all of which expired on December 31, 1995. The Company has currently outstanding options issued under the Plans for 115,500 shares, options for 2,576,582 shares issued other than under the Plans. Of such shares, 100,000 are being offered or have been sold pursuant to the Current Prospectus. Of such shares, 1,038,718 are being offered pursuant to this Prospectus. 68 See "MANAGEMENT -- Stock Options and Stock Appreciation Rights" and "CONCURRENT OFFERING." Transfer Agent The Company's transfer agent is Continental Stock Transfer & Trust Company, New York, New York 10007. Shares Eligible for Future Sale Upon completion of this Offering, there will be 15,075,784 shares of Common Stock outstanding. Of these shares, the 100,000 shares offered pursuant to the Concurrent Prospectus and the 3,727,145 offered hereby will be freely tradeable without restriction under the Securities Act, for so long as the Current Prospectus and this Prospectus are kept current by the Company. An aggregate of approximately 750,000 shares of Common Stock held by existing stockholders will be "restricted" shares as defined in Rule 144. In general, under Rule 144 a person (or group of persons whose shares are aggregated) who has beneficially owned restricted shares of the Company for at least two years, including any person why may be deemed to be an "affiliate" of the Company (as the term "affiliate" is defined under the Securities Act), is entitled to sell in normal brokerage transactions during the periods when certain information regarding the Company is publicly available, within any three-month period, an amount of shares that does not exceed the greater of (i) the average weekly trading volume in the Company's shares during the four calendar weeks preceding such sale or (ii) 1% of the shares then outstanding. A person who has not been an "affiliate" of the Company for the three months prior to such sale and who has held restricted shares for at least three years would be entitled to sell such shares without restriction. Most of such restricted shares have been held by non-affiliates of the Company for more than three years by affiliates of the Company for more than two years. Actual sales, or the prospect of sales by the present stockholders of the company, or by future holders of restricted securities under Rule 144, or otherwise, may, in the future, have a depressive effect upon the price of the Company's shares of Common Stock in any market that may develop therefore, and also could render difficult sales of the Company's securities purchased by investors herein. 69 SELLING SECURITY HOLDERS Up to 3,727,145 of the 3,850,000 Security Holders' Shares to which this Prospectus relates may be sold by Selling Security Holders who have acquired or acquire such shares from the Company (i) upon the exercise of currently exercisable options and warrants, and pursuant to SARs, (ii) upon issuance to consultants pursuant to existing agreements or (iii) upon issuance in connection with certain financings. The Company will not receive any of the proceeds from sales of such shares by Selling Security Holders, but will receive the exercise price upon the exercise of options or warrants by Selling Security Holders. The Selling Security Holders received registration rights with respect to the shares offered hereunder pursuant to verbal or written agreements with the Company. All costs, expenses and fees in connection with the registration of the Security Holders' Shares will be borne by the Company. All brokerage commissions, if any, attributable to the sale of Security Holders' Shares by Selling Security Holders will be borne by such Selling Security Holders. The Selling Security Holders are offering hereby a total of 3,727,145 shares of Common Stock. The following table sets forth the name of each person who is a Selling Security Holder, the number of securities owned by each such person at the time of this offering and the number of shares of Common Stock such person will own after the completion of this offering. The following table assumes the exercise of all options and warrants beneficially owned by each such security holder.
Beneficial Ownership Beneficial Ownership Prior to Offering(1) After Offering(1) -------------------- -------------- Name of Selling Shares Included Security Holder Shares % In This Offering Shares % - --------------- ------ - ---------------- ------ - Washington Post (A) 2,341,334 (2) 20.54% 2,341,334 - * William C. Samuels (B)(C) 3,321,917 (3) 27.8% 633,035 276,592 1.82% David Reese (B)(C) 105,000 (4) * 105,000 - * Michael J. Freeman (B) 206,598 1.81% 70,956 135,642 * Howard Squadron (C) 65,267 (5) * 65,267 - * James Crook (B) 48,294 (6) * 48,294 - * Bruce Crowley (B)(C) 33,000 (7) * 33,000 - * Gerard Klauer (G) 30,000 (8) * 30,000 - * Marketing Group Establishment, Inc. (E) 3,000 * 3,000 - * Christopher Cline (B) 27,685 * 27,285 400 * Comstar Computer (F) 25,000 * 25,000 - * Craig Ullman (B) 25,000(10) * 25,000 - * Ed Downe (E) 25,000 (7) * 25,000 - * Richmont Consulting (D) 25,000(11) * 25,000 - * Jay Kaplowitz (C) 27,000 (9) * 25,000 2,000 * Sheila Kaplowitz (H) 22,500 * 22,500 - * Nick Rhodes (E) 25,000(12) * 25,000 - * Richard Hyman (C) 25,000 (7) * 25,000 - * Wall St. Consultants Inc. (D) 25,000 (7) * 25,000 - * Wall St. Group (D) 25,000 * 2,500 - * Barry Berman (B) 10,833 * 10,833 - *
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Beneficial Ownership Beneficial Ownership Prior to Offering(1) After Offering(1) ----------------- -------------- Name of Selling Shares Included Security Holder Shares % In This Offering Shares % - ---------------- ------ - ---------------- ------ - Cynthia Baker (B) 10,000 (7) * 10,000 - * CDV Telecommunications (F) 32,000 * 32,000 - * Mabel Phifer (E) 5,000 (8) * 5,000 - * Walter Barwick (E) 5,000 (8) * 5,000 - * Richard Aurelio (B) 4,183 (13) * 4,183 - * Eric Martinez (B) 4,000 (10) * 4,000 - * James Kearney (B) 3,000 (10) * 3,000 - * Linda Baldomir (B) 3,000 (10) * 3,000 - * ETR & Associates (G) 2,000 (8) * 2,000 - * John Posteraro (G) 500 (8) * 500 - * Pierre Rovira (B) 458 * 458 - * John Clarke (D) 30,000 (11) * 30,000 - * Paul Mannion (D) 30,000 (11) * 30,000 - * Marty Klein (E) 5,000 (11) * 5,000 - * TOTAL 3,727,145 =========
- -------------- * Indicates less than 1% of common shares outstanding. A. The Selling Security Holder acquired such shares in connection with the March 17, 1992 loan financing. (See "Certain Transactions.") B. The Selling Security Holder either is currently an employee of the Company, or was previously employed by the Company. The Selling Security Holder has acquired, or will acquire, the shares being registered hereunder, as compensation for services rendered to the Company, pursuant to the Company's 1989 Incentive Stock Option Plan, the Company's 1989 Non-Qualified Plan, the Company's Stock Appreciation Rights Plan, option agreements or employment agreements. C. The Selling Security Holder currently serves on the Company's Board of Directors. The Selling Security Holder has acquired, or will acquire, the shares being registered hereunder, as compensation for services rendered to the Company, pursuant to option agreements or employment agreements. (See "Management.") D. The Selling Security Holder has provided, or will provide, financial public relations consulting services to the Company, and has acquired, or will acquire, the shares being registered hereunder as consideration for such services. E. The Selling Security Holder has provided, or will provide, either marketing, general business or programming consulting services to the Company, and has acquired, or will acquire, the shares being registered hereunder as consideration for such services. F. The Selling Security Holder has provided, or will provide, services to the Company related to research and development, and has acquired, or will acquire, the shares being registered hereunder as consideration for such services. G. The Selling Security Holder provided financial services to the Company which included assisting the Company in obtaining financing. As consideration for such services, the Company granted such Selling Security Holder options to purchase shares of the Company's Common Stock. H. The Selling Security Holder acquired the shares being registered hereunder pursuant to arrangements made in connection with the March 1992 loan financing. (See "Certain Transactions" and "Legal Matters.") (1) Gives effect to exercise of all of the options and warrants for which the underlying shares of Common Stock are being offered hereby and the sale of all of the shares of Common Stock being offered by the Selling Security Holders. (2) The Shares owned by the Post Company are subject to a voting trust agreement among the Company, the Post Company and William C. Samuels as Voting Trustee, but does not prohibit the Post Company from selling the shares. See "CERTAIN TRANSACTIONS" and "PRINCIPAL STOCKHOLDERS." (3) Mr. Samuels is President, Chief Executive Officer and a Director of the Company. Includes 240,950 shares owned by Mr. Samuels, up to 533,035 shares of Common Stock issuable to Mr. Samuels upon the exercise of stock options at $2.50 per share, 2,341,334 shares owned of record by the Post Company as to which Mr. Samuels is the Voting Trustee pursuant to an agreement among the Company, the Post Company and Mr. Samuels, as well as 206,598 shares owned of record by Michael J. Freeman as to which Mr. Samuels is the Voting Trustee pursuant to an agreement between Mr. Samuels and Mr. Freeman. See "CERTAIN TRANSACTIONS" and "PRINCIPAL STOCKHOLDERS." (4) Mr. Reese is Executive Vice President and a Director of the Company. Consists of immediately exercisable options to purchase 55,317 shares of the Company's Common Stock at an exercise price of $3.50 per share and 49,683 shares at an exercise price of $2.50 per share. (5) Includes immediately exercisable options to purchase 25,000 shares of the Company's Common Stock at an exercise price of $3.50 per share and 25,000 shares at an exercise 71 price of $2.50 per share. (6) Includes immediately exercisable options to purchase 21,000 shares of the Company's Common Stock at an exercise price of $2.50 per share, immediately exercisable options to purchase 10,000 shares at an exercise price of $3.50 per share, and 14,000 shares reserved for issuance pursuant to vested SARs. (7) Consists of immediately exercisable options to purchase shares of the Company's Common Stock at $3.50 per share. (8) Consists of immediately exercisable options to purchase shares of the Company's Common Stock at $5.50 per share. (9) Includes immediately exercisable options to purchase 25,000 shares of the Company's Common Stock at $3.50 per share. (10) Includes immediately exercisable options to purchase 12,500 shares of the Company's Common Stock at $2.50 per share, and immediately exercisable options to purchase 12,500 shares at an exercise price of $3.50 per share. (11) Consists of immediately exercisable options to purchase shares of the Company's Common Stock at $4.00 per share. (12) Consists of immediately exercisable options to purchase shares of the Company's Common Stock at $5.00 per share. (13) Includes immediately exercisable options to purchase 2,683 shares of the Company's Common Stock at an exercise price of $3.50 per share and 1,500 shares at an exercise price of $2.50 per share. 72 PLAN OF DISTRIBUTION The Securities offered hereby are the 2,500,000 Company Shares and 3,850,000 Security Holders' Shares. The Company will not engage in any "at the market offering" of securities through this Prospectus. Company Shares The Company commenced the offering of the Company Shares promptly after the initial date of the Prospectus and intends to continue the offering until all of the Company Shares have been sold or, prior thereto, until the Company determines, in its sole discretion, to terminate the offering. During the offering period, the Company intends to immediately offer to sell all or any portion of the Company Shares at $4.50 per share to institutional investors and to certain accredited individuals and organizations in one or more privately negotiated transactions either directly or in an offering underwritten by a broker-dealer on either a firm commitment or best efforts basis. However, the Company currently does not have any commitment from or understanding with any broker-dealer firm to underwrite the offering of any of the Company Shares. If at any time any of the Company Shares are offered on behalf of the Company by a broker-dealer firm, the Company will amend this Prospectus to set forth the name and address of such broker-dealer, the number of shares being offered by such broker-dealer, the terms of such offering, the discounts, commissions or concessions allowed or reallowed or paid to the broker-dealer, and the proposed selling price to the public. The NASD member firms that currently make a market in the Company's Common Stock, as most recently reported to the Company by the NASD, are Gruntal & Co. Incorporated, Josephthal Lyon & Ross, Dominick & Dominick, Inc., Troster Singer Corp., Sherwood Securities Corp., A.G. Edwards & Sons, Inc., Herzog, Heine, Geduld, Inc., Nash Weiss/Div. of Shatkin Inv., Mayer & Schweitzer Inc., Wagner Stott & Co., Gerald Klauer Mattison & Co., Donald & Co. Securities Inc., Fahnestock & Co., Inc., Wm. V. Frankel & Co., Inc., and Maidstone Financial, Inc. Under the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations thereunder, any person engaged in a distribution of the securities offered by this Prospectus may not simultaneously engage in market-making activities with respect to shares of the Common Stock during the applicable "cooling off" period (two or nine days) prior to the commencement of such distribution. Security Holders' Shares Up to 122,855 of the Security Holders' Shares may be issued by the Company upon the exercise of options, warrants or pursuant to SARs, that are currently outstanding and are not exercisable for a period of six months. Up to 3,727,145 of the Security Holders' Shares may be sold by the Selling Security Holders who have acquired or acquire such shares from the Company (i) upon the exercise of currently exercisable options and warrants, and pursuant to SARs, and (ii) upon the issuance to consultants pursuant to existing agreements, and (iii) upon issuance in connection with certain financings. The Company will not receive any of the proceeds from any sales by Selling Security Holders of Security Holder Shares, but will receive the exercise price upon the exercise of options or 73 warrants by the Security Holders. See "SELLING SECURITY HOLDERS." The Selling Security Holders' sales of shares of Common Stock may be effected from time to time in transactions (which may include block transactions) in the over-the-counter market or the Boston Stock Exchange, in negotiated transactions, through the writing of options on the Common Stock, or a combination of such methods of sale, at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Selling Security Holders may effect such transactions by selling Common Stock directly to purchasers or to or through broker-dealers which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Security Holders and/or the purchasers of Common Stock for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Security Holders and any broker-dealers that act in connection with the sale of the Common Stock or Redeemable Warrants might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act. The Selling Security Holders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act. Because the Selling Security Holders may each be deemed to be an "underwriter" within the meaning of Section 2(11) of the Securities Act, the Selling Security Holders will be subject to prospectus delivery requirements under the Securities Act. Furthermore, in the event of a "distribution" of its shares, the Selling Security Holder, any selling broker or dealer and any "affiliated purchasers" may be subject to Rule 10b-6 under the Exchange Act until its participation in that distribution is completed. At the time a particular offer of Security Holders' Shares, made by or on behalf of any of the Selling Security Holders, to the extent such offer constitutes as distribution under the Securities Act, a supplement to this Prospectus will be distributed which will set forth the type and number of securities being offered by such Selling Security Holders and the terms of such offering, including the name or names and addresses of any underwriters, dealers or agents, the purchase price paid by any underwriter for securities purchased from the Selling Security Holder and any discounts, commissions or concessions allowed or reallowed or paid to dealers, and the proposed selling price to the public. The Company will bear all costs and expenses of the registration under the Securities Act and certain state securities laws of the Security Holders' Shares. However, all brokerage commissions, if any, attributable to the sale of such shares by holders thereof will be borne by such holders. CONCURRENT OFFERING Pursuant to the Concurrent Prospectus, there are being offered for sale by a selling security holder 100,000 shares of Common Stock, consisting of 20,000 outstanding shares and 80,000 shares issued or issuable by the Company upon the exercise of currently exercisable options. The Company will not receive any of the proceeds from the sales of the Common Stock by the 74 selling security holder, but will receive the exercise price upon the exercise of options by the selling security holder. LEGAL MATTERS Certain legal matters, including the legality of the issuance of the shares of Common Stock offered by the Company, are being passed upon for the Company by Gersten, Savage, Kaplowitz & Curtin, LLP, 575 Lexington Avenue, New York, New York 10022. Jay M. Kaplowitz, a member of Gersten, Savage, Kaplowitz & Curtin, LLP has been a director of the Company since 1989. Mr. Kaplowitz owns 2,000 shares of the Company's Common Stock and other options to purchase 25,000 shares, and Sheila Kaplowitz, his wife, owns 22,500 shares of Common Stock. Mr. Kaplowitz and Mrs. Kaplowitz are named as Selling Security Holders and are offering certain securities pursuant to this Prospectus. (See "Selling Security Holders" and "Certain Transactions.") Edward Curtin, a member of the firm of Gersten, Savage, Kaplowitz & Curtin, LLP, owns 2,000 shares of Common Stock of the Company and Jill Curtin, his wife, also owns 2,000 shares of Common Stock of the Company. EXPERTS The consolidated financial statements of ACTV, Inc. as of December 31, 1994 and December 31, 1993 and for the three years ended December 31, 1994 and the financial statements of ACTV Interactive as of December 31, 1993 and December 31, 1992 and for the periods then ended included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 with respect to the securities offered by this Prospectus. This Prospectus omits certain information contained in the Registration Statement, as permitted by the Rules and Regulations of the Commission. For further information, reference is made to the Registration Statement, which may be obtained from the Commission's principal facility at 450 Fifth Street, N.W., Washington, D.C., 20549 upon payment of the Commission's charge for copying. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not complete. Where such contract or other document is an exhibit to the Registration Statement, each such statement is deemed to be qualified and amplified in all respects by the provision of the exhibit. 75 INDEX TO FINANCIAL STATEMENTS ACTV, Inc. and Subsidiaries - Fiscal Years Ended December 31, 1993 and 1994
Independent Auditors' Report.........................................................................F-2 Consolidated Balance Sheets..........................................................................F-3 Consolidated Statements of Operations................................................................F-4 Consolidated Statements of Shareholders' Equity......................................................F-5 Consolidated Statements of Cash Flows................................................................F-6 Notes to Consolidated Financial Statements...........................................................F-7 to F-16
ACTV Interactive (a general partnership) - Fiscal Period Ended December 31, 1992, and Fiscal Year Ended December 31, 1993
Independent Auditors' Report.........................................................................F-17 Balance Sheets.......................................................................................F-18 Statements of Operations.............................................................................F-19 Statements of Partners' Capital......................................................................F-20 Statements of Cash Flows.............................................................................F-21 Notes to Financial Statements........................................................................F-22 to F-23
ACTV, Inc. and Subsidiaries - Nine Months Ended September 30, 1994 and 1995 (Unaudited)
Consolidated Balance Sheets..........................................................................F-24 Consolidated Statements of Operations................................................................F-25 Consolidated Statements of Shareholders' Equity......................................................F-26 Consolidated Statements of Cash Flows................................................................F-27 Notes to Consolidated Financial Statements...........................................................F-28
ACTV Interactive (a general partnership) - Fiscal Period From January 1, 1994 to March 11, 1994 (Unaudited)
Balance Sheet........................................................................................F-29 Statements of Operations.............................................................................F-30 Statements of Cash Flows.............................................................................F-31 Notes to Financial Statements........................................................................F-32
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of ACTV, Inc.: We have audited the accompanying consolidated balance sheets of ACTV, Inc. and subsidiaries (the "Company") as of December 31, 1994 and 1993 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1994 and 1993 and the results of its operations and its cash flows in the three year period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP New York, New York March 15, 1995 F-2 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, 1993 1994 ---- ---- Current Assets: Cash and cash equivalents................. $3,858,863 $2,479,840 Accounts receivable....................... 186,684 198,353 Education equipment inventory............. -- 146,283 Other..................................... 7,001 114,937 ---------------- ---------------- Total current assets.................. 4,052,548 2,939,413 ---------------- ---------------- Property and equipment-net................ 6,207 5,712 ---------------- ---------------- Other Assets: Video program inventory................... 1,074,120 644,472 Patents and patents pending............... 42,295 174,181 Investment in partnership................. 697,916 -- Goodwill.................................. -- 3,920,304 Other..................................... 47,634 49,232 ---------------- ---------------- Total other assets.................... 1,861,965 4,788,189 ---------------- ---------------- Total............................ $5,920,720 $7,733,314 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses..... $199,191 $660,268 Equipment lease payable (related party) 290,872 -- Deferred stock appreciation rights........ 1,299,260 750,192 Short-term note payable................... -- 25,250 ------------------ ------------------ Total current liabilities............. 1,789,323 1,435,710 Long-term liabilities repayable from repayment pool (including amounts payable to related parties).................................. 709,794 -- Convertible note payable (related party)....... 1,511,000 -- Notes payable (related parties)................ -- 2,325,061 ------------------ ------------------ Total liabilities..................... 4,010,117 3,760,771 Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, none issued........ -- -- Common stock, $.10 par value, 17,000,000 shares authorized: issued and outstand- ing 6,507,799 at December 31, 1993, 9,019,550 at December 31, 1994........ 650,780 901,955 Additional paid-in capital................ 20,332,825 26,608,830 ------------------ ------------------ Total................................. 20,983,605 27,510,785 Accumulated deficit....................... (19,073,002) (23,538,242) ------------------ ------------------ Total shareholders' equity............ 1,910,603 3,972,543 ------------------ ------------------ Total............................ $5,920,720 $7,733,314 ================== ==================
See Notes to Consolidated Financial Statements F-3 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro-Forma (Note 14) Year Ended December 31, 1992 1993 1994 1994 ---- ---- ---- ---- Revenues: Sales revenues............................ $186,598 $ -- $928,640 $1,128,472 License fees from related party........... 338,275 127,746 -- -- Royalties from related party.............. 7,723 36,856 9,776 -- ---------------- ---------------- ---------------- ---------------- Total revenues......................... 532,596 164,602 938,416 1,128,472 Cost of Sales............................. -- -- 296,839 364,119 -- ---------------- ---------------- ---------------- ---------------- Gross profit........................... 532,596 164,602 641,577 764,353 Expenses: Operating expenses........................ 348,147 145,344 890,871 983,971 Selling and administrative................ 1,815,425 1,463,962 4,193,931 4,519,997 Depreciation and amortization............. 635,275 534,947 446,092 446,092 Amortization of goodwill.................. -- -- 343,467 343,467 Stock appreciation rights................. -- 1,299,260 (437,068) (437,068) ---------------- ---------------- ---------------- ---------------- Total expenses......................... 2,798,847 3,443,513 5,437,293 5,856,459 Interest (income)............................ (18,955) (56,480) (43,877) (47,409) Interest expense-- related parties........... 343,008 428,221 226,671 226,671 ---------------- ---------------- ---------------- ---------------- Interest expense (income) - net........... 324,053 371,741 182,794 179,262 Loss before minority interest in equity of investee and extraordinary gain 2,590,304 3,650,652 4,978,510 5,271,368 Interest in ACTV Interactive................. (187,781) (506,303) (143,500) -- ---------------- ---------------- ---------------- ---------------- Net loss before extraordinary gain......................................... 2,778,085 4,156,955 5,122,010 5,271,368 Gain on extinguishment of debt and equipment lease obligations............................ -- -- 656,770 656,770 ---------------- ---------------- ---------------- ---------------- Net loss..................................... $2,778,085 $4,156,955 $4,465,240 $4,614,598 ================ ================ ================ ================ Loss per common share before extraordinary gain........................... $.59 $.72 $ .65 $.67 Loss per common share after extraordinary gain........................... $.59 $.72 $ .57 $.58 Weighted average number of common shares outstanding.................................. 4,665,686 5,800,134 7,897,278 7,897,278
See Notes to Consolidated Financial Statements F-4 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY From January 1, 1992 to December 31, 1994
Common Stock Additional Paid-In Shares Amount Capital Deficit ------ ------ ------- ------- Balances January 1, 1992 4,043,867 $404,387 $13,508,613 $(12,137,962) Formation of ACTV Interactive --- --- 1,225,000 --- Shares issued to Washington Post pursuant to Note 720,000 72,000 648,000 --- Shares issued for services rendered 64,361 6,436 57,925 --- Net Loss --- --- --- (2,778,085) -------------- ------------- ---------------- ------------- Balances December 31, 1992 4,828,228 $482,823 $15,439,538 $(14,916,047) Issuance of shares in connection with exercise of warrant 1,507,236 150,723 4,466,996 --- Issuance of shares in connection with exercise of stock options 172,335 17,234 426,291 --- Net loss --- --- --- (4,156,955) -------------- ------------- ---------------- ------------- Balances December 31, 1993 6,507,799 $650,780 $20,332,825 $(19,073,002) Issuance of shares in connection with financing 757,100 75,710 2,892,628 --- Issuance of shares in connection with exercise of stock options 818,317 81,832 1,564,326 --- Issuance of shares in connection with conversion of convertible note 871,334 87,133 1,508,051 --- Issuance of shares for services 65,000 6,500 311,000 Net loss --- --- --- (4,465,240) -------------- ------------- ---------------- ------------- Balances December 31, 1994 9,019,550 $901,955 26,608,830 $(23,538,242) ========= ======== ========== =============
See Notes to Consolidated Financial Statements. F-5 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1992 1993 1994 ---- ---- ---- Cash flows from operating activities: Net loss.................................. $2,778,085 $4,156,955 $4,465,240 ----------------- ------------------ ------------------ Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization............. 635,275 534,947 789,558 Stock appreciation rights................. -- 1,299,260 (549,068) Gain on extinguishment of debt and equipment lease obligations.............. -- -- (656,770) Stock issued in lieu of cash compensation.............................. 64,361 -- 250,000 Reclassification of equipment............. -- -- 1,151 Changes in assets and liabilities: Loss from interest in ACTV Interactive 187,781 506,303 143,500 Accounts receivable....................... 27,309 (102,945) (48,917) Other assets.............................. 20,832 (3,551) 31,765 Accounts payable and accrued expenses....... (35,890) 142,668 404,733 Education equipment inventory............. -- -- (13,183) Other liabilities......................... (2,000) -- -- Interest payable.......................... 342,998 428,000 226,619 ----------------- ------------------ ------------------ Net cash used in operating activities............................ (1,537,419) (1,352,273) (3,885,852) ----------------- ------------------ ------------------ Cash flows from financing activities: Contribution to partnership............... (167,000) -- -- Proceeds from exercise of warrants and options............................... -- 5,061,244 1,646,159 Proceeds from equity financing............ 1,500,000 -- 2,968,338 Equipment lease repayment................. -- -- (65,000) Repayment pool principal repayment........ -- -- (71,020) ----------------- ------------------ ------------------ Net cash provided by financing activities 1,333,000 5,061,244 4,478,477 Cash flows from investing activities: Cash acquired in acquisition of remaining interest in affiliate -- -- 672,160 Cash paid for interest in affiliate -- -- (2,500,000) Investment in patents pending............. -- -- (142,122) Investment in property and equipment (16,050) (5,828) (1,686) ----------------- ------------------ ------------------ Net cash used in investing activities (16,050) (5,828) (1,971,648) ----------------- ------------------ ------------------ Net (decrease) increase in cash and cash equivalents.................................... (220,469) 3,703,143 (1,379,023) Cash and cash equivalents, beginning of period....................... 376,189 155,720 3,858,863 ----------------- ------------------ ------------------ Cash and cash equivalents, end of period............................. 155,720 3,858,863 2,479,840 ================= ================== ==================
See Notes to Consolidated Financial Statements. Supplemental disclosure of cash flow information: See Note 15 F-6 ACTV, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization ACTV, Inc., incorporated July 8, 1983, and its subsidiaries (the 'Company' or 'ACTV'), were organized to develop and market a proprietary interactive television programming technology (the 'Programming Technology'), that permits a viewer to experience instantly responsive television. Since its inception, the Company has been engaged in the development of the Programming Technology, as well as the production of interactive programs ('ACTV Programming') and the marketing and sales of the various products and services incorporating the Programming Technology. In March 1988, the Company formed ACTV Entertainment, Inc. ('ACTV Entertainment'), formerly ACTV Domestic Corporation, and granted it a license to develop, promote, distribute and market interactive television incorporating the Programming Technology in the United States cable, DBS, and broadcast television markets. On June 8, 1993, the Company became the sole shareholder in ACTV Entertainment under the terms of an agreement with a subsidiary of Le Groupe Videotron, Ltee. ('LGV'). The agreement also provides LGV with a 20-year, non-exclusive, royalty-free license to produce ACTV Programming for a limited number of potential Videoway subscribers in the United States, Canada and certain European countries. The license is limited to the condition that neither LGV nor its sublicensees receive any royalty or other fees with respect to ACTV Programming, except for promotion and direct production expenses paid by LGV. Any royalties from third party programmers will be paid exclusively to ACTV Entertainment. The financial statements consolidate the financial results of ACTV Entertainment with those of the Company. ACTV Entertainment is currently dependent on advances and/or loans from the Company. On July 14, 1992, the Company entered into an agreement with a subsidiary of The Washington Post Company (the 'Post Company') to form ACTV Interactive, a partnership organized for the purpose of marketing products and services incorporating the Company's Programming Technology to the education marketplace. The Company contributed its applicable Programming Technology and the subsidiary of the Post Company contributed $2,500,000 in cash. As a result thereof, the Company recognized an increase of $1,225,000 in its additional paid-in capital representing its pro rata share in the equity of the joint venture. The Company owned, during 1993, through its wholly owned subsidiary ACTV Interactive, Inc. ('Interactive'), formerly ACTV Education, Inc., a 49% interest in ACTV Interactive, and accounted for its investment under the equity method of accounting. Furthermore, under the terms of a worldwide license, the Company received a 5% royalty on sales made by ACTV Interactive. Interactive is currently dependent on advances and/or loans from the Company. On March 11, 1994, the Company purchased the Post Company's full 51% interest in ACTV Interactive for $2.5 million in cash and a $2 million 8% note due December 31, 1996. (See Note 12.) Principles of Consolidation The Company's consolidated financial statements include the balances of its two wholly-owned subsidiaries, ACTV Entertainment and Interactive. In consolidation, all intercompany account balances are eliminated. F-7 Property and Equipment - Property and equipment are recorded at cost and depreciated on the straight-line method over their estimated useful lives (generally five years). Depreciation expense for the years ended December 31, 1992, 1993 and 1994 aggregated $135,353, $61,662, and $6,207 respectively. Video Program Inventory - Video program inventory of the Company, which is stated at the lower of cost or net realizable value, consists of capitalized production costs related to programs completed. All video program inventory for items not currently in use has been fully amortized as of December 31, 1994. The Company is amortizing those programs that are still in use over a period of five years, which approximates their estimated useful life. The balances at December 31, 1993, and 1994, are net of accumulated amortization of $1,626,495 and $2,056,143, respectively. No entertainment programs were in production at either December 31, 1993, or 1994. Education Equipment - Education equipment consists of ACTV System 500 interactive terminals, ACTV videocassette recorders, television monitors and computer printers that the Company holds in inventory. This inventory is carried on the Company's books at the lower of cost or market. Patents and Patents Pending - The cost of patents, which for patents issued represents the consideration paid for the assignment of patent rights to the Company by an employee and for patents pending represents legal costs related directly to such patents pending, is being amortized on a straight-line basis over the estimated economic lives of the respective patents (averaging 10 years), which is less than the statutory life of each patent. The balances at December 31, 1993, and 1994, are net of accumulated amortization of $75,086 and $85,969, respectively. The patents and patents pending have been assigned as collateral for obligations to the Post Company under the March 11, 1994, agreement. Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Revenue Recognition - Sales are primarily recorded as products are shipped and services are rendered, using the completed contract method of accounting. Research and Development - Research and development costs, which represent primarily refinements to the Programming Technology, was de minimus for the year ended December 31, 1992, totaled $171,802 for the year ended December 31, 1993 and $465,740 for the year ended December 31, 1994. Loss per Common Share - Loss per common share equals net loss divided by the weighted average number of shares of Common Stock outstanding during the period. Reclassifications - Certain reclassifications have been made in the December 31, 1992, and 1993, financial statements to conform to the December 31, 1994, presentation. Intangibles - The excess of the purchase price over the fair value of assets acquired (goodwill), which arose in 1994 upon the Company's purchase from the Post Company of its 51% interest in ACTV Interactive (Note 12), is being amortized on a straight-line basis over a period of 10 years. On a quarterly basis, the Company evaluates the realizability of goodwill based upon the expected undiscounted cash flows of the acquired business. Impairments, if any, will be recognized through a charge to operations in the period in which the impairment is deemed to exist. Based on such analysis, the Company does not believe that goodwill has been impaired. F-8 2. PROPERTY AND EQUIPMENT - NET Property and equipment - net at December 31, 1993, and 1994, consisted of the following (at cost):
1993 1994 ---- ---- Machinery and equipment $815,436 $815,949 Office furniture and fixtures 184,318 189,515 Vehicles 19,105 0 ----------- -------------- 1,018,859 1,005,464 Less accumulated depreciation 1,012,652 999,752 --------- ---------- Total $6,207 $5,712 =========== ===========
3. RESTRUCTURING AND REFINANCING On June 11, 1985, the Company entered into a Refinancing and Restructuring Agreement (the 'Plan') providing for the termination of prior agreements relating to the formation of ACTV, Inc. The Plan also stated that any amounts owing by the Company to related parties and other creditors at the date of the agreement were the responsibility of the Company. Such amounts were to be repayable solely from the 'Repayment Pool', which was defined as ten percent ,of 'available cash flow' in excess of $1,000,000 generated by the Company in any given calendar year. Available cash flow was defined as the excess of gross revenues (excluding financing proceeds) over certain cash expenditures. At December 31, 1993 total obligations repayable solely from the Repayment Pool aggregated $709,794. During 1994, the Company, in separate transactions concluded with all holders of Repayment Pool obligations, settled all outstanding liabilities related to the Repayment Pool. Average consideration paid by the Company in such settlement transactions was approximately 17% of face value. For the year ended December 31, 1994, the Company recoginzed an extraordinary gain of $620,898 related to the Repayment Pool settlement transactions. 4. RELATED PARTY TRANSACTIONS Equipment Lease Payable - On January 12, 1984, the Company entered into an equipment lease agreement with a related party. Under the terms of this operating lease, the Company was required to make base rental payments of $8,814 per month for five years. In April of 1986, rental payments were discontinued. All unpaid rentals from April 1986 through December 31, 1988, were accrued as current liabilities in the financial statements for the year ended December 31, 1993, due to the fact that the rental payments may have been paid by a third party, a former officer of the Company, who instituted litigation against the Company to seek reimbursement. During 1994, the Company settled this dispute by paying $65,000 in cash and by issuing a promissory note in the amount of $190,000 to the complainant. For the year ended December 31, 1994, the Company recognized an extraordinary gain of $35,872 related to this settlement. F-9 Other - Interest expense on amounts due to related parties for the years ended December 31, 1992, 1993 and 1994 aggregated $19,998, $20,000, and $0, respectively. 5. FINANCING ACTIVITIES During the fourth quarter of 1994, the Company raised approximately $2,970,000 from a series of private sales of shares of the Company's common stock totaling 757,100 shares. In March 1992, the Company issued to the Post Company $1,500,000 aggregate principal amount of units represented by an 8% convertible note (the 'Convertible Note') and 720,000 shares of the Company's common stock (the 'Common Stock'). Also in March 1992, the Post Company acquired pursuant to an option agreement (the 'Option Agreement') an option to purchase up to 750,000 shares of Common Stock at either $2.00 or $2.50 per share, depending on the date of exercise. Both the conversion of the Convertible Note and the exercise of the option were dependent upon the occurrence of certain events. The Convertible Note required that 25% of the outstanding balance be retired by March 17, 1994, and the remaining outstanding balance be retired in three semi-annual installments. The Company recorded the fair market value of the common shares issued ($720,000) as original issue discount, and had been amortizing this amount over the life of the Notes. The Convertible Note was secured by a security interest as described in Note 12. In connection with the Option Agreement, the Post Company also received the right to purchase from the Company at a fair market exercise price to be determined an amount of shares of Common Stock necessary to increase the Post Company's percentage ownership of the total then outstanding shares of Common Stock to 51%. Such right is exercisable through March 17, 1997, subject to extension in certain circumstances. Until March 17, 1995, the Post Company agreed not to acquire more than 40% of the Company unless certain events occurred, such as a tender offer, a proxy contest, or the acquisition by a third party of in excess of 15% of the Company's common stock, as set forth in a standstill agreement between the Company and the Post Company. In March 1994, the Post Company exercised its option to purchase 750,000 shares at $2.00 per share, and converted the Convertible Note's principal, plus accrued interest of $241,000, into 871,334 shares of the Common Stock. (See Note 13.) In May 1993, the Company completed the redemption of its outstanding Redeemable Warrants. The Company received approximately $4.5 million from the warrant exercise to purchase approximately 1.5 million shares of Common Stock. The Company's continued marketing of all its products and services on planned levels and timetables is dependent upon the Company's obtaining the additional capital necessary to support the Company's future operations at these levels. Management is continuing its efforts to obtain such additional financing and has retained the services of an investment banking firm toward this end. If the Company is not successful in obtaining such additional financing, management believes that the Company can fund its operations for the next twelve months by reducing certain planned expenditures in certain of the markets it is attempting to develop. If management's assumptions regarding future events prove incorrect, the Company may be unable to fund its operations, even at a reduced level, through the next twelve month period. F-10 6. SHAREHOLDERS' EQUITY Common Stock At December 31, 1994, the Company was authorized to issue 17,000,000 shares of Common Stock, of which 9,019,550 were issued and outstanding. During 1992, the Company issued 64,361 shares of Common Stock to three employees in lieu of scheduled compensation and to a consultant and a director in lieu of established fees. The fair market value of these shares at the date of issuance was recorded as an expense in the financial statements. At December 31, 1994, the Company had reserved shares of Common Stock for issuance as follows: 1989 Qualified Stock Option Plan 83,000 1989 Non-Qualified Stock Option Plan 69,500 Underwriter's Warrant exercise 100,000 Options granted outside of formal plans 1,401,604 -------------------- Total 1,654,104 ====================
Preferred Stock At December 31, 1994, the Company was authorized to issue 1,000,000 shares of Preferred Stock, par value $0.10 per share, designated as Series A Convertible Preferred Stock (666,667 shares) and Series B Convertible Preferred Stock (333,333 shares). No shares of Preferred Stock are issued and outstanding. Underwriter Warrants In April 1993, the Company and the underwriter of the Company's initial public offering of May 1990 (the 'Underwriter') executed an agreement pursuant to which the Underwriter will provide financial advisory and investment banking services to the Company for two years, and the Company issued to the Underwriter warrants to purchase 100,000 shares of Common Stock at $5.50 per share, exercisable at any time through December 31, 1995. On the date of issuance of these warrants, the market price of the Company's common shares was greater than the warrant exercise price. F-11 7. STOCK OPTIONS During 1989, the Board of Directors approved an Employee Incentive Stock Option Plan (the 'Employee Plan'). The Employee Plan provides for the granting of up to 100,000 options to purchase Common Stock to key employees. The Employee Plan stipulates that the option price be not less than fair market value on the date of grant. Options granted will have an expiration date not to exceed ten years from the date of grant. At December 31, 1994, 100,000 options had been granted under this plan, of which 17,000 had been exercised. In addition, in August 1989, the Board of Directors approved a Non-Qualified Stock Option Plan (the 'Non-Qualified Plan'), to be administered by the Board or a committee appointed by the Board. The Non-Qualified Plan provides for the granting of up to 100,000 options to purchase shares of Common Stock to employees, officers, directors, consultants and independent contractors. The Non-Qualified Plan stipulates that the option price be not less than fair market value at the date of grant, or such other price as the Board may determine. Options granted under this Plan shall expire on a date determined by the committee but in no event later than three months after the termination of employment or retainer. At December 31, 1994, 100,000 options had been granted under this plan, of which 30,500 had been exercised. At December 31, 1994, the Company had options outstanding that were issued to a Director, certain employees and consultants for the purchase 1,401,604 shares of Common Stock . The prices of these options range from $2.50 to $8.19 per share; they have expiration dates in the years 1993 through 2002. The options granted are not part of the Employee Incentive Stock Option Plan or the Non-Qualified Stock Option Plan discussed above. A summary of stock option transactions is as follows:
December 31, December 31, 1993 1994 ---- ---- Options outstanding, beginning of period 884,554 1,442,934 Options granted to employee pursuant to 1989 Agreement 152,948 0 Warrants granted to joint venture partner 172,000 0 Warrants granted to underwriter 100,000 0 Options granted outside of formal plans 251,000 376,500 Options granted under 1989 Plans 83,000 0 Options exercised (172,793) (68,316) Options canceled (27,775) (97,014) ------------------- -------------------- Options outstanding, end of period 1,442,934 1,654,104 =================== ==================== Options exercisable, end of period 1,139,434 1,064,254 Price range of outstanding options, $.82 to $2.50 to end of period $16.38 $8.19
F-12 8. STOCK APPRECIATION RIGHTS PLAN The Company's 1992 Stock Appreciation Rights Plan ('SAR Plan') was approved by the Company's stockholders in December 1992. Subject to adjustment as set forth in the SAR Plan, the aggregate number of Stock Appreciation Rights ('SARs') that may be granted shall not exceed 900,000. The SAR Plan is administered by the Stock Appreciation Rights Committee (the 'SAR Committee'). SARs may not be exercised until the expiration of six months from the date of grant, but in no event were exercisable earlier than May 1, 1994. If a holder of a SAR ceases to be an employee, director or consultant of the Company or one of its subsidiaries or an affiliate, other than by reason of the holder's death or disability, any SARs that have not vested shall become void. SARs are not transferable except by will or under the laws of descent and distribution. Upon exercise of a SAR, the holder will receive for each share for which a SAR is exercised, as determined by the SAR Committee in its discretion, (a) shares of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's Common Stock, equal to the difference between (i) the fair market value per share of the Common Stock on the date of exercise of the SAR and (ii) the value of a SAR, which amount shall be no less than the fair market value per share of Common Stock on the date of grant of the SAR. Under the Company's SAR Plan, as of December 31, 1994, the Company has granted 260,000 SARs to William Samuels, 160,000 SARs to Dr. Michael Freeman, 110,000 to David Reese, 100,000 to Bruce Crowley, 26,000 to Gregory Harper, and 70,000 to James Crook. The initial price of all the SARs granted to Dr. Freeman and Mr. Crook, 160,000 of the SARs granted to Mr. Samuels, 80,000 of the SARs granted to Mr. Reese, and 12,000 of the SARs granted to Mr. Harper was $1.50 per share, an amount equal to the fair market value of a share of Common Stock on the date of grant in 1992. All of the SARs granted to Mr. Crowley, 100,000 of the SARs granted to Mr. Samuels and 30,000 of the SARs granted to Mr. Reese and 12,000 of the SARs granted to Mr. Harper are at the price of $5.50 per share, an amount equal to the fair market value of a share of Common Stock on the respective dates of grant. The SARs expire between 1998 and 2004. One-fifth of the total SARs granted to each recipient vest at the end of each 12-month period following the date of grant. 9. INCOME TAXES The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes', effective January 1, 1993. There was no cumulative effect of adopting SFAS No. 109 on the Company's financial statements. The Company previously reported taxes under the guidance of APB Opinion No. 11, 'Accounting for Income Taxes.' Deferred income taxes reflect the net tax effects at an effective tax rate of 35.33% of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset as of December 31, 1994, and December 31, 1993, are as follows: F-13
1994 1993 ---- ---- Deferred tax assets: Operating loss carryforwards $8,225,157 $6,417,000 Differences between book and tax basis of property 246,539 552,000 ----------- ----------- 8,471,696 6,969,000 Deferred tax liabilities: Differences between book and tax basis of property (170,010) (155,000) ----------- ----------- 8,301,686 6,814,000 Valuation Allowance (8,301,686) (6,814,000) ----------- ----------- Net deferred tax asset $ 0 $ 0 =========== ===========
The increase in the valuation allowance for the year ended December 31, 1993, was approximately $1,490,000. There was no provision or benefit for Federal income taxes as a result of the net operating loss in the current year. At December 31, 1994, the Company has federal net operating loss carryovers of approximately $23,000,000. These carryovers may be subject to certain limitations and will expire between the years 1998 and 2008. 10. COMMITMENTS At December 31, 1994, future aggregate minimum lease commitments under non-cancelable operating leases, which expire in 1995 and 1999, were approximately $258,000. The leases contain customary escalation clauses, based principally on real estate taxes. Rent expense related to these leases for the years ended December 31, 1992, 1993 and 1994 aggregated $172,260, $97,584, and $169,457 respectively. The Company has employment agreements with certain key employees. These agreements extend for a period of a maximum of five years and contain non-competition provisions which extend two years after termination of employment with the Company. At December 31, 1994, the Company is committed to expend a total of $1,871,250 under these agreements. 11. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables. The Company attempts to mitigate cash investment risks by placing such investments in insured depository accounts and with financial institutions that have high credit ratings. Concentrations of risk with respect to trade receivables exist because of the relatively few companies or other organizations (primarily educational or government bodies) with which the Company currently does business. The Company attempts to limit these risks by closely monitoring the credit of those to whom it is contemplating providing its products, and continuing such credit monitoring activities and other collection activities throughout the payment period. In certain instances, the Company further minimizes concentrations of credit risks by requiring partial advance payments for the products provided. F-14 12. PURCHASE OF REMAINING INTEREST IN SUBSIDIARY On March 11, 1994, the Company purchased the Post Company's full 51% interest in ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million in cash at closing and a $2 million note due December 31, 1996, (the 'New Note'). The New Note accrues interest at 8%, and must be pre-paid from net proceeds in excess of an aggregate $5 million received by the Company in the event it completes future debt or equity financing. The principal of the New Note is secured by certain collateral pursuant to a security agreement, through which the Post Company acquired (a) a security interest in and lien, second in priority, with respect to the collateral as to which the Company has granted a first priority security interest pursuant to the Termination Agreement and (b) a security interest in and lien, first in priority, with respect to any existing United States patents and pending applications. 13. CONVERSION OF OPTIONS AND CONVERTIBLE NOTE On March 15, 1994, the unpaid principal and accrued and unpaid interest on the $1,500,000 Convertible Note were converted into 871,334 shares of Common Stock of the Company at $2.00 per share. On March 15, 1994, the Post Company exercised its option to purchase an additional 750,000 shares of the Company's Common Stock at $2.00 per share, receiving 750,000 shares at $2.00 per share. 14. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, AND DECEMBER 31, 1994 The unaudited pro forma consolidated statement of operations for the year ended December 31, 1994, has been prepared to reflect the financial effects of the event described in Note 12, as if it had occurred on January 1, 1994. This statement consolidates the results of the Company and ACTV Interactive, for the year ended December 31, 1994, with the following adjustments: inclusion of revenues and expenses of ACTV Interactive from January 1, 1994, to March 11, 1994; elimination of intercompany sales and royalty expense; and elimination of the Company's loss for its interest in ACTV Interactive under the equity method of accounting. The Company's pro forma statement of operations for the year ended December 31, 1993, prepared as indicated above but assuming that the events described in Note 12 and Note 13 occurred January 1, 1993, is as follows:
Revenues $970,498 Cost of sales 237,683 Operating expenses 639,781 General and administrative expenses 2,603,736 Depreciation and amortization 893,692 Stock appreciation rights 1,299,260 Net interest expense 91,014 ------ Net loss $4,794,668 ========== Net loss per share $.65 ==========
F-15 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The consolidated balance sheet at December 31, 1994, reflects non-cash activity during the year ended December 31, 1994, that relates to the Company's purchase on March 11, 1994 of the Washington Post Company's 51% interest in ACTV Interactive: issuance of note payable of $2,000,000, and the acquisition of net assets other than cash of $118,485. This net asset amount is comprised of current assets of $238,560, fixed assets of $5,176, inventory of $133,101 and current liabilities of $258,352. In addition, in a separate non-cash transaction, the Post Company's convertible note payable was converted to common stock and additional paid in capital (net of original issue discount of $147,484) of $1,595,183. The consolidated balance sheet at December 31, 1994, also reflects non-cash activity during the year ended December 31, 1994, that relates: (i) to the extinguishment of the Company's equipment lease obligation to a related party: issuance of note payable of $190,000; (ii) to the extinguishment of a portion of the Company's contingent Repayment Pool obligation: issuance of note payable of $25,000; and (iii) to the issuance of common stock in exchange for services to be rendered: increase in common stock and additional paid in capital of $67,500 and increase in prepaid expense of $67,500. The Company made no cash payments of interest or income taxes during the years ended December 31, 1993 and 1994. F-16 INDEPENDENT AUDITORS' REPORT To the Board of Directors of ACTV Interactive: We have audited the accompanying balance sheets of ACTV Interactive (the "Partnership") as of December 31, 1993 and 1992 and the related statements of operations, partners' capital and cash flows for the year ended December 31, 1993 and the period from July 14, 1992 (date of formation) through December 31, 1992. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of ACTV Interactive at December 31, 1993 and 1992 and the results of its operations and its cash flows for the year ended December 31, 1993 and the period July 14, 1992 (date of formation) through December 31, 1992 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche, LLP New York, New York March 15, 1994 F-17 ACTV INTERACTIVE BALANCE SHEETS
December 31, December 31, 1992 1993 ---- ---- ASSETS Current Assets: Cash and cash equivalents......................... $2,041,987 $969,973 Accounts receivable............................... 104,169 188,174 Inventory......................................... 15,883 148,068 Other............................................. 895 82,720 ------------------ -------------------- Total current assets.......................... 2,162,934 1,388,935 ------------------ -------------------- Total................................ $2,162,934 $1,388,935 ================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses (including $10,343 payable to related party at December 31, 1992 and $178,728 payable to related party at December 31, 1993)................................ $38,517 $297,476 Royalty payable -- related party.................. 7,645 7,955 ------------------ ------------------- Total current liabilities..................... 46,162 305,431 ------------------ ------------------- Commitments and Contingencies.......................... -- -- Partners' Capital...................................... 2,116,772 1,083,504 ------------------ ------------------- Total................................ $2,162,934 $1,388,935 ================== ===================
See Notes to Financial Statements. F-18 ACTV INTERACTIVE STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JULY 14, 1992 (DATE OF FORMATION) TO DECEMBER 31, 1992 AND THE YEAR ENDED DECEMBER 31, 1993
Period Ended Year Ended December 31, December 31, 1992 1993 ---- ---- Revenues.................................................. $348,473 $839,165 Cost of Goods Sold........................................ 172,394 238,020 ------------------ ------------------ Gross Profit.............................................. 176,079 601,145 Expenses: General and administrative, including royalty expense to related party of $33,269 in 1993 ....... and $11,309 in 1992....................................... 581,960 1,667,142 ------------------ ------------------ Loss from operations................................. 405,881 1,065,997 Interest income........................................... 22,653 32,727 ------------------ ------------------ Net Loss.................................................. 383,228 1,033,270 ================== ==================
See Notes to Financial Statements. F-19 ACTV INTERACTIVE STATEMENT OF PARTNERS' CAPITAL FROM JULY 14, 1992 (DATE OF FORMATION) TO DECEMBER 31, 1993
Partners' Contributions/ Accumulated Partners' Distributions Deficit Capital --------------- ------- ------- Initial Capital Contribution by Post Company (July 14, 1992) $2,500,000 $ -- $2,500,000 Net Loss 383,228 -------------------- -------------------- --------------------- Balances December 31, 1992 $2,500,000 $383,228 $2,116,772 Net Loss 1,033,270 -------------------- -------------------- --------------------- Balance December 31, 1993 $2,500,000 $1,416,498 $1,083,502 ==================== ==================== =====================
See Notes to Financial Statements. F-20 ACTV INTERACTIVE STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JULY 14, 1992 (DATE OF FORMATION) TO DECEMBER 31, 1992 AND THE YEAR ENDED DECEMBER 31, 1993
Period Ended Year Ended December 31, December 31, 1992 1993 ---- ---- Cash flows from operating activities: Net loss................................................. $383,228 $1,033,270 ------------------- -------------------- Changes in assets and liabilities: Accounts receivable...................................... (104,169) (84,005) Inventory................................................ (15,883) (132,185) Other assets............................................. (895) (81,825) Accounts payable and accrued expenses............................................. 46,162 259,271 ------------------- -------------------- Net cash (used) in operating activities........................................... (458,013) (1,072,014) Cash flows from financing activities: Proceeds from formation of partnership................... 2,500,000 -- ------------------- ------------------- Net cash provided by financing activities................ 2,500,000 -- ------------------- ------------------- Net increase (decrease) in cash and cash equivalents.......... 2,041,987 (1,072,014) Cash and cash equivalents beginning of period................. -- 2,041,987 ------------------- ------------------- Cash and cash equivalents end of period....................... 2,041,987 969,973 =================== ===================
See Notes to Financial Statements. F-21 ACTV INTERACTIVE Notes To Financial Statements For The Periods Ended December 31, 1992 and December 31, 1993 1. ORGANIZATION On July 14, 1992, a subsidiary of the Company entered into a partnership agreement (the "Partnership Agreement") with a subsidiary of The Washington Post Company (the "Post Company") to form ACTV Interactive ("Interactive"), a partnership organized pursuant to the provisions of the partnership law of the State of Delaware for the purpose of marketing products and services incorporating the Programming Technology to the education marketplace. Upon the formation of Interactive, the Company contributed its Programming Technology and the Post Company contributed $2,500,000. The Post Company at December 31, 1993 owned a 51% interest in Interactive and the Company owned a 49% interest. Furthermore, the Company received a 5% royalty on certain sales made by Interactive. The Programming Technology contributed by the Company to the partnership is recorded at the Company's historical cost, which is zero, because the Company expensed the research and development costs related to the Programming Technology. 2. SIGNIFICANT ACCOUNTING POLICIES Partnership Income/Loss Allocation- Since its formation Interactive has not generated revenues sufficient to fund its operations and has experienced operating losses. Profits and losses have been allocated to the partners based upon the allocation percentages outlined in the Partnership Agreement. Revenue Recognition- Sales are primarily recorded as products are shipped and services are rendered, using the completed contract method of accounting. Cash Equivalents- Interactive considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Operating Losses- Since inception, Interactive's revenues have been insufficient to fund operations. Management believes, however, that its current funds will be sufficient to fund ongoing operations for the next twelve months. Inventory- Inventory, which consists principally of interactive terminals with ACTV Programming functionality and VCRs that are modified for use with the terminals, is valued at the lower of cost or market. 3. ALLOCATED EXPENSES Certain expenses reported by Interactive are expenses that were incurred by the Company and allocated to Interactive. These allocations, depending on the expense, are based either on actual usage by each entity of the good or service consumed, or on pre-set formulas, which are reviewed from time to time by management for their appropriateness. In 1992 and 1993, the approximate aggregate values of allocated expenses were $330,000 and $480,000, respectively. 4. CONCENTRATIONS OF CREDIT RISK F-22 Financial instruments that potentially subject Interactive to concentrations of credit risk consist principally of temporary cash investments and trade receivables. Interactive attempts to mitigate such risks by placing its temporary cash investments in insured depository accounts or with high credit-rated financial institutions. Concentrations of risk with respect to trade receivables exist because of the relatively few companies or other organizations (primarily educational or government bodies), with which Interactive currently does business. Interactive attempts to limit these risks by closely monitoring the credit of those to whom it is contemplating providing its products, and continuing such credit monitoring activities and other collection activities throughout the payment period. In certain instances, Interactive further minimizes concentrations of credit risks by requiring partial advance payments for the products provided. F-23 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 1995 ---- ASSETS Current Assets: Cash and cash equivalents................. $5,090,642 Accounts receivable....................... 337,211 Education equipment inventory............. 169,610 Other..................................... 84,571 ----------------- Total current assets.................. 5,682,034 ----------------- Property and equipment-net................ 422,202 ----------------- Other Assets: Video program inventory................... 322,236 Patents and patents pending............... 272,780 Goodwill.................................. 3,600,525 Other..................................... 155,157 ----------------- Total other assets.................... 4,350,698 ----------------- Total............................ $10,454,934 ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..... 929,355 Deferred stock appreciation rights........ 1,294,148 Short-term note payable................... -- ----------------- Total current liabilities............. 2,223,503 Notes payable (related parties)................ 222,219 ----------------- Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, none issued....... -- Common stock, $.10 par value, 17,000,000 shares authorized: issued and outstand- ing 11,375,150 at September 30, 1995.. 1,137,515 Additional paid-in capital................ 36,634,659 Notes receivable from stock sales......... (567,500) ----------------- Accumulated deficit....................... (29,195,462) ----------------- Total shareholders' equity............ 8,009,212 ================= Total............................ $10,454,934 =================
See Notes to Consolidated Financial Statements F-24 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Month Periods Ended September 30, 1994 1995 ---- ---- Revenues: Sales revenues.................... $758,963 $1,075,925 Royalties from related party...... 9,776 -- --------------- --------------- Total revenues................. 768,739 1,075,925 Cost of Sales..................... 233,661 318,665 --------------- --------------- Gross profit................... 535,078 757,260 Expenses: Operating expenses................ 751,581 829,781 Selling and administrative........ 2,870,441 3,600,124 Depreciation and amortization..... 334,259 499,261 Amortization of goodwill.......... 236,874 319,779 Stock appreciation rights......... (11,095) 1,249,206 --------------- --------------- Total expense.................. 4,182,060 6,498,151 Interest (income).................... (37,995) (83,150) Interest expense - related parties... 184,186 93,596 --------------- --------------- Interest expense (income) - net... 146,191 10,446 Other (income)....................... (7,316) -- Loss before minority interest in equity of investee................ 3,785,857 5,751,337 Interest in ACTV Interactive......... 143,500 -- --------------- --------------- Net loss before extraordinary gain................................. 3,929,357 5,751,337 Extraordinary gain on retirement of debt................................. 521,803 94,117 --------------- --------------- Net loss............................. $3,407,554 $5,657,220 =============== =============== Loss per share before extraordinary gain................................. $.51 $.59 Loss per share after extraordinary gain................................. $.44 $.58 ================ ================ Weighted average number of common shares outstanding............ 7,699,790 9,748,209
See Notes to Consolidated Financial Statements F-25 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY From December 31, 1994 to September 30, 1995 (Unaudited)
Common Stock Additional ------------ Paid-In Shares Amount Capital Deficit ------ ------ ------- ------- Balances December 31, 1994 9,019,550 $901,955 $26,608,830 $(23,538,242) Shares issued for services rendered 68,329 6,833 273,362 Issuance of shares in connection with financings 1,990,293 199,029 8,730,626 Issuance of shares in connection with exercise of stock options 296,956 29,696 1,021,841 Net loss --- --- --- (5,657,220) ---------- ---------- ----------- ------------- Balances September 30, 1995 11,375,150 $1,137,515 $36,634,659 $(29,195,462) ========== ========== =========== =============
See Notes to Consolidated Financial Statements. F-26 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Month Periods Ended September 30, 1994 1995 ---- ---- Cash flows from operating activities: Net loss.................................. $3,407,554 $5,657,220 ----------------- ------------------ Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization............. 571,133 926,402 Stock appreciation rights................. (11,095) 543,956 Gain on extinguishment of repayment pool and equipment lease obligations (521,804) -- Gain on extinguishment of debt obligations........................... -- (94,717) Reclassification of equipment 1,151 -- Common stock issued for services -- 563,430 Changes in assets and liabilities: Loss from interest in ACTV Interactive 143,500 -- Accounts receivable....................... (179,195) (138,858) Other assets.............................. (12,736) 56,992 Accounts payable and accrued expenses 160,420 3,986 Education equipment inventory............. 23,165 (23,327) Receivable from affiliate................. (15,324) -- Interest payable.......................... 184,188 93,333 ----------------- ------------------ ----------------- ------------------ Net cash (used) in operating activities....................... (3,064,151) (3,726,023) ----------------- ------------------ Cash flows from financing activities: Proceeds from sale of common stock -- 8,951,859 Proceeds from exercise of warrants and options............................... 1,608,660 68,600 Discounted prepayment of note............. -- (101,458) , Note repayments........................... -- (2,025,250) Equipment lease repayment................. (65,000) -- Repayment pool principal repayment........ (45,000) -- ----------------- ------------------ ----------------- ------------------ Net cash provided by (used in) financing activities..................................... 1,498,660 6,893,751 Cash flows from investing activities: Cash acquired in acquisition of remaining interest in affiliate 672,160 -- Cash paid for interest in affiliate (2,500,000) -- Investment in patents pending............. (111,691) -- Investment in property and equipment (1,150) (556,926) ----------------- ------------------ ----------------- ------------------ Net cash used in investing activities (1,940,681) (556,926) ----------------- ------------------ ----------------- ------------------ Net increase (decrease) in cash and cash equivalents.................................... (3,506,172) 2,610,802 Cash and cash equivalents, beginning of period....................... 3,858,863 2,479,840 ----------------- ------------------ ----------------- ------------------ Cash and cash equivalents, end of period............................. 352,691 5,090,642 ================= ==================
Supplemental disclosure of noncash investing activity: see notes to consolidated financial statements F-27 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1994 AND SEPTEMBER 30, 1995 1. The consolidated financial statements for the periods ended September 30, 1994 and September 30, 1995 are unaudited. In the opinion of management, these consolidated financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results for all periods. The financial results for the interim periods presented are not necessarily indicative of the results to be expected for either succeeding quarters or the full fiscal year. 2. For a summary of significant accounting policies and additional financial information, see the Company's consolidated financial statements for the years ended December 31, 1993 and December 31, 1994. 3. The consolidated statements of operations for the nine month period ended September 30, 1995, reflect an extraordinary gain of $94,117 on the extinguishment of an obligation to Nolan Bushnell. On April 25, 1994, the Company entered into a Settlement Agreement (the "Bushnell Settlement Agreement") with Mr. Bushnell under which Mr. Bushnell released the Company from certain obligations. Pursuant to the Bushnell Settlement Agreement, ACTV issued to Mr. Bushnell, among other consideration, a promissory note in the principal amount of $190,000, payable in two installments on June 30, 1995, and June 30, 1996. In January 1995, the Company and Mr. Bushnell agreed to a discounting of the note for payment in full at that time. Separately, the consolidated statements of operations for the three month and nine month periods ended September 30, 1994, reflect an extraordinary gain of $231,845 on the extinguishment of certain obligations to Nolan Bushnell and Catalyst Technologies. 4. The Company's balance sheet at September 30, 1995 reflects a debit to shareholders' equity of $567,500 related to non-recourse loans made by the Company to certain employees in August 1995 to purchase the Company's Common Stock by exercising options. The due dates of the non-recourse loans correspond with the respective expiration dates of the options exercised. 5. The following pro forma consolidated statement of operations for the nine months ended September 30, 1994 has been prepared to reflect the financial effects of the Company's March 11, 1994, purchase of the Washington Post Company's interest in ACTV Interactive as if it had occurred on January 1, 1994. This statement consolidates the results of the Company and ACTV Interactive for the nine months ended September 30, 1994, with the following adjustments: elimination of intercompany sales and royalty expense, recognition of increased amortization expense related to goodwill, recognition of increased interest expense on the $2 million note payable to the Washington Post Company, and elimination of the Company's loss related to its interest in ACTV Interactive under the equity method of accounting. Revenues $958,795 Cost of sales 300,941 Operating expenses 844,681 General and administrative expenses 3,196,507 Depreciation and amortization 571,133 Stock appreciation rights (11,095) Net interest expense 142,659 Other income 7,316 Extraordinary gain 521,803 ------- Net loss $3,556,912 ========== Net loss per share $.46 ====
F-28 ACTV INTERACTIVE BALANCE SHEETS
March 11, 1994 (Unaudited) ASSETS Current Assets: Cash and cash equivalents......................... $672,160 Accounts receivable............................... 164,759 Inventory......................................... 133,101 Other............................................. 78,976 ------------------- Total current assets.......................... 1,048,996 ------------------- Total................................ $1,048,996 =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses (including $201,484 payable to related party at March 11, 1994)............... $258,100 Royalty payable-- related party................... 250 ------------------- Total current liabilities..................... 258,350 ------------------- Commitments and Contingencies.......................... -- Partners' Capital 790,646 ------------------- Total................................ $1,048,996 ===================
See Notes to Financial Statements. F-29 ACTV INTERACTIVE STATEMENTS OF OPERATIONS FOR THE 3 MONTHS ENDED MARCH 31, 1993 AND FOR THE PERIOD FROM JANUARY 1, 1994 TO MARCH 11, 1994 (Unaudited)
3 Months Ended Period Ended March 31, March 11, 1993 1994 ---- ---- Revenues.................................................. $157,641 $199,832 Cost of Goods Sold........................................ 70,839 67,280 ------------------- ------------------- Gross Profit.............................................. 86,802 132,552 Expenses: General and administrative, including royalty expense to related party of $6,483 in 1993 and $9,801 in 1994............................. 355,993 428,942 ------------------- ------------------- Loss from operations................................. 269,191 296,390 Interest income........................................... 10,509 3,532 ------------------- ------------------- Net Loss.................................................. 258,682 292,858 =================== =================== See Notes to Financial Statements. F-30 ACTV INTERACTIVE STATEMENTS OF CASH FLOWS FOR THE 3 MONTHS ENDED MARCH 31, 1993 AND FOR THE PERIOD FROM JANUARY 1, 1994 TO MARCH 11, 1994 (Unaudited)
3 Months Ended Period Ended March 31, March 11, 1993 1994 ---- ---- Cash flows from operating activities: Net loss................................................. $258,682 $292,858 ------------------- -------------------- Changes in assets and liabilities: Accounts receivable...................................... (117,888) 23,415 Inventory................................................ 10,730 14,967 Other assets............................................. (2,226) 3,744 Accounts payable and accrued expenses............................................. 77,002 (47,081) ------------------- -------------------- Net cash (used) in operating activities........................................... (291,064) (297,813) Cash flows from financing activities: -- -- ------------------- -------------------- Net cash provided by financing activities................ -- -- ------------------- -------------------- Net (decrease) in cash and cash equivalents................... (291,064) (297,813) Cash and cash equivalents beginning of period................. 2,041,987 969,973 ------------------- -------------------- Cash and cash equivalents end of period....................... 1,750,923 672,160 =================== ====================
See Notes to Financial Statements. F-31 ACTV INTERACTIVE NOTES TO FINANCIAL STATEMENTS 1. The financial statements for the periods ended March 31, 1993 and March 11, 1994 are unaudited. In the opinion of management, these financial statements reflect all adjustments necessary for a fair presentation of the results for all periods. The financial results for the interim periods presented are not necessarily indicative of the results to be expected for either succeeding quarters or the full fiscal year. 2. On March 11, 1994, ACTV, Inc. acquired the Washington Post Company's entire 51% interest in ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million in cash at closing and a $2 million note due December 31, 1996. F-32 No underwriter, dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer or solicitation to any person in any jurisdiction where such offer or solicitation would be unlawful. Neither delivery of this Prospectus nor any Common Stock sale hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. TABLE OF CONTENTS Page Prospectus Summary................ 4 Risk Factors...................... 9 Dilution.......................... 17 Use of Proceeds................... 18 Certain Market Information........ 19 Capitalization.................... 20 Dividend Policy................... 21 Summary Financial Data............ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................... 23 Business.......................... 34 Management........................ 51 Certain Transactions.............. 63 Principal Stockholders............ 65 Description of Capital Stock...... 67 Selling Security Holders.......... 70 Plan of Distribution.............. 73 Concurrent Offering............... 74 Legal Matters..................... 75 Experts........................... 75 Index to Financial Statements..... F-1 ACTV, INC. 2,500,000 shares of Common Stock offered by the Company 3,850,000 shares of Common Stock (1) 122,855 Shares Issuable by the Company Upon the Exercise of Options, Warrants, Pursuant to SARs, or to Others (2) 3,727,145 Shares Offered by Selling Security Holders - ---------------- , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Reference is made to paragraph "Twelfth" of the Restated Certificate of Incorporation of the Company (Exhibit 4.1.1), which contains a provision, as permitted by Section 145 of the Delaware General Corporation Law, that eliminates the personal liability of directors to the Company and its stockholders for monetary damages for unintentional breach of a director's fiduciary duty to the Company. This provision does not permit any limitation on, or elimination of the liability of a director for disloyalty to the Company or its stockholders, for failing to acting good faith, for engaging in intentional misconduct or a knowing violation of law, for obtaining an improper personal benefit or for paying a dividend or approving a stock repurchase that was illegal under the Delaware General Corporation Law. The Restated Certificate of Incorporation and By-Laws of the Company require the Company to indemnify directors and officers against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative other than an action by or in the right of the corporation (a "derivative action") if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action. Moreover, the Delaware General Corporation Law requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the Company. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) in connection with the securities being registered, the Company will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 15. RECENT SALES OF UNREGISTERED SECURITIES. The following tables set forth certain information with respect to sales by the Company of its Common Stock, and Stock Options during the past three years. All such sales were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as there was no public offering involved insofar as each investor had access to all material information regarding the Company and each was adequately familiar with the affairs of the Company. II-1
COMMON STOCK Date of Purchase Purchaser Shares Options Purchase Price Per Share - --------- ------ ------- -------- --------------- The Washington Post Company(1) 750,000 3/94 $2.00 The Washington Post Company(3) 871,334 3/93 $2.00 Malarky-Taylor(2) 1,155 4/94 $2.35 Eric Martinez 3,000 5/94 $2.50 David Brenner(2) 14,661 9/94 $0.82 William C. Samuels(2) 10,000 9/94 $2.50 William C. Samuels(2) 10,000 9/94 $2.50 Monarch Development Corp.(5) 75,000 10/94 $3.00 Bola Business Systems(5) 75,000 10/94 $2.98 Bola Business Ltd.(5) 75,000 10/94 $2.98 Monarch Development(5) 75,000 10/94 $3.00 Westfield Securities(4) 50,000 11/94 $5.00 Maidstone Financial, Inc.(4) 15,000 12/94 $4.50 Monarch Development 50,000 12/94 $2.70 Bola Business Ltd. 50,000 12/94 $2.70 Cameron Associates(4) 5,715 1/95 $3.44 Christopher Cline(4) 2,285 1/95 $1.75 Shar Offenberg(4) 15,000 1/95 $4.69 James Crook(4) 1,200 1/95 $1.75 Maidstone Financial, Inc.(4) 10,000 1/95 $4.63 Comstar Computer Corp.(4) 25,000 2/95 $4.80 Richter & Co.(2) 6,000 3/95 $1.03 ETR & Associates(4) 6,000 4/95 $4.75 John Posteraro(4) 1,500 4/95 $4.75 William C. Samuels(2) 20,000 4/95 $2.50 Covergence Industry Assoc.(4) 1,629 8/95 $4.97 William C. Samuels(2) 80,000 8/95 $2.50 William C. Samuels(2) 80,000 8/95 $3.50
Date of Purchase Purchaser Shares Options Purchase Price Per Share - --------- ------ ------- -------- --------------- Christopher Cline(2) 25,000 8/95 $3.50 Michael Freeman(2) 70,956 10/95 $5.75 Barry Berman(2) 10,833 10/95 $5.00
(1) Issued in connection with the loan financing in March 1992. (2) Includes options issued or shares issuable upon exercise of options. II-2 (3) Issued upon conversion of the principal and unpaid accrued interest of an 8% Convertible Promissory Note. (4) Issued in lieu of compensation. (5) The shares were issued pursuant to Regulation S. STOCK OPTIONS 1989 Incentive Stock Option Plan
Date Exercise Exercised Name Options Issued Price or Expired - ---- ------- ------ -------- ---------- Gregory Harper 10,000 6/92 $2.50 10,000 Linda Baldomir 1,500 11/92 $2.50 0 Eric Martinez 5,000 11/92 $2.50 1,000 James Kearney 12,500 11/92 $2.50 9,500 Richard Aurelio 5,000 11/92 $2.50 3,500 Alex Feldman 5,000 11/92 $2.50 5,000 R. James Crook 12,500 11/92 $2.50 0 Gregory Harper 12,000 1/93 $2.50 12,000 Craig Ullman 6,250 1/93 $2.50 0 Richard Aurelio 2,433 11/93 $3.50 0 Craig Ullman 12,500 11/93 $3.50 0 David Reese 15,317 11/93 $3.50 0
1989 Non-Qualified Plan
Date Exercise Exercised Name Options Issued Price or Expired - ---- ------- ------ -------- ---------- Linda Baldomir 1,500 11/92 $2.50 0 Eric Martinez 5,000 11/92 $2.50 5,000 James Kearney 12,500 11/92 $2.50 12,500 Richard Aurelio 5,000 11/92 $2.50 5,000 Alex Feldman 5,000 11/92 $2.50 5,000 R. James Crook 12,500 11/92 $2.50 4,000 Gregory Harper 12,000 1/93 $2.50 12,000 Howard Squadron 25,000 1/93 $2.50 0 Steven Cody 5,000 1/93 $2.50 0 Craig Ullman 6,250 1/93 $2.50 0 Walter Barwick 5,000 7/93 $5.50 0 Mabel Phifer 5,000 7/93 $5.50 0 Richard Aurelio 250 11/93 $5.50 0
II-3 Other Stock Options
Date Exercise Exercised Name Options Issued Price or Expired - ---- ------- ------ -------- ---------- William C. Samuels 152,948 4/93 $2.50 80,000 Gregory Harper 60,500 10/93 $5.50 60,500 William Frank 100,000 10/93 $5.50 100,000 Cynthia Baker 25,000 11/93 $3.50 0 Barry Berman 25,000 11/93 $5.00 25,000 Christopher Cline 25,000 11/93 $3.50 25,000 William Morris 72,000 12/93 $5.50 72,000 William Morris 100,000 12/93 $5.50 100,000 Tri-Cap 10,000 12/93 $5.50 10,000 Bruce Crowley 100,000 7/94 $3.50 0 ETR & Associates 2,000 10/94 $5.50 0 John Posteraro 500 10/94 $5.50 0 David Reese 40,000 11/94 $3.50 0 William C. Samuels 80,000 11/94 $3.50 80,000 R. James Crook 20,000 11/94 $3.50 0 Jay M. Kaplowitz 25,000 11/94 $3.50 0 Gerard Klauer 30,000 11/94 $5.50 0 Gerard Klauer 5,000 12/94 $5.50 0 Wall St. Group 25,000 12/94 $3.50 0 Richard Hyman 25,000 1/95 $3.50 0 Howard Squadron 25,000 1/95 $3.50 0 Kaufman 25,000 1/95 $3.50 3,000 Downe 50,000 1/95 $3.50 0 Nick Rhodes 25,000 3/95 $5.00 0 Brent Imai 25,000 4/95 $4.00 0 R. Becker 25,000 4/95 $4.00 0 M. Klein 25,000 7/95 $4.50 0 B. Batson 25,000 8/95 $4.50 0 Christopher Cline 25,000 8/95 $4.00 0 R. Becker 25,000 8/95 $4.00 0 Richard Aurelio 10,000 8/95 $4.00 0 Craig Ullman 25,000 8/95 $4.00 0 Linda Baldomir 5,000 8/95 $4.00 0 R. Bennett 20,000 9/95 $0.00 10,000 Paul Mannion 30,000 12/95 $4.00 0 John Clarke 30,000 12/95 $4.00 0 William C. Samuels 100,087 12/95 $2.50 0 Marty Klein 5,000 12/95 $3.25 0 Bruce Crowley 201,000 12/95 $3.25 0 David Reese 330,000 12/95 $3.25 0 William C. Samuels 525,000 12/95 $3.25 0 Sarnoff 100,000 12/95 $3.75 0
II-4 WARRANTS(1)
Date Exercise Exercised Name Warrants Issued Price or Expired - ---- -------- ------ -------- ---------- Lawrence Rice 6,163 4/93 $ .12 all Dan Purjes 44,491 4/93 $ .12 all Paul Fitzgerald 101 4/93 $ .12 all Michael Loew 142 4/93 $ .12 all Charles Roden 4,039 4/93 $ .12 all Peter Sheib 6,671 4/93 $ .12 all Matthew Balk 571 4/93 $ .12 all Joan Taylor 4,000 4/93 $ .12 all Frank Garriton 1,000 4/93 $ .12 all Frank Colen 600 4/93 $ .12 all Continental Stock 212 4/93 $ .12 all Transfer & Trust Co. Averal Satloff 2,846 4/93 $ .12 all Mark Schlefer 8,500 4/93 $ .12 all Lester Rosenkrantz 3,504 4/93 $ .12 all Robin Davis 2,160 4/93 $ .12 all
II-5
Date Exercise Exercised Name Warrants Issued Price or Expired - ---- -------- ------ -------- ---------- Josephthal Lyon 100,000 4/93 $5.50 all & Ross, Inc. Lawrence Rice 8,012 4/93 $ .45 all Dan Purjes 57,838 4/93 $ .45 all Paul Fitzgerald 131 4/93 $ .45 all Michael Loew 185 4/93 $ .45 all Charles Roden 5,251 4/93 $ .45 all Peter Sheib 8,672 4/93 $ .45 all Matthew Balk 742 4/93 $ .45 all Joan Taylor 5,200 4/93 $ .45 all Frank Garriton 1,300 4/93 $ .45 all Frank Colen 780 4/93 $ .45 all Continental Stock 726 4/93 $ .45 all Transfer & Trust Co. Averal Satloff 3,700 4/93 $ .45 all Mark Schlefer 11,050 4/93 $ .45 all Lester Rosenkrantz 4,555 4/93 $ .45 all Robin Davis 2,808 4/93 $ .45 all Lawrence Rice(5) 8,012 4/93 $3.45 all Dan Purjes(5) 57,838 4/93 $3.45 all Paul Fitzgerald(5) 131 4/93 $3.45 all Michael Loew(5) 185 4/93 $3.45 all Charles Roden(5) 5,251 4/93 $3.45 all Peter Sheib(5) 8,672 4/93 $3.45 all Matthew Balk(5) 742 4/93 $3.45 all Joan Taylor(5) 5,200 4/93 $3.45 all Frank Garriton(5) 1,300 4/93 $3.45 all Frank Colen(5) 780 4/93 $3.45 all Continental Stock(5) 276 4/93 $3.45 all Transfer & Trust Co. Averal Satloff(5) 3,700 4/93 $3.45 all Mark Schlefer(5) 11,050 4/93 $3.45 all Lester Rosenkrantz(5) 4,555 4/93 $3.45 all Robin Davis(5) 2,808 4/93 $3.45 all
- --------------- (1) Warrants issued pursuant to an agreement between the Company and Josephthal, Lyon & Ross. II-6 16. FINANCIAL SCHEDULES AND EXHIBITS. The following is a list of all the exhibits and financial statement schedules filed as part of the Registration Statement: (a) Exhibits (inapplicable items omitted): 3. (i)(a) Restated Certificate of Incorporation.* (b) Amendment to Certificate of Incorporation.****** (ii) By-Laws.* (iii) Form of Warrant Agreement by and between the Registrant and Continental Stock Transfer and Trust Company, as Warrant Agent.* (iv) Form of Underwriter's Warrant Agreement by and between the Registrant and the Underwriter.* (v) Intentionally Omitted.* 5. (i) Opinion of Gersten, Savage, Kaplowitz & Curtin 9. Voting Trust Agreements (i)-(xxi) Deleted. (xxii) Voting Agreement dated November 11, 1994, by and between William C. Samuels and Michael J. Freeman. (xxiii) Voting Trust Agreement dated March 10, 1994 by and among William C. Samuels, The Washington Post Company and ACTV, Inc. - formerly 10(lxix)****** 10. Material Contracts. (i) Deleted.* (ii) Lease, dated December 5, 1986, by and between the Registrant, as the Tenant, and Rockefeller Center Properties, as the Landlord.* (iii) Deleted. (iv) Deleted (v) Deleted. (vi) License Agreement, dated November 2, 1987, by and between the Registrant and Le LGV, Ltee with respect to Canada, Europe and the USSR.* (vii) Deleted. (viii) Stock Purchase Agreement, dated March 8, 1988, by and among ACTV Entertainment Corp.(formerly ACTV Entertainment Broadcast Corp.), the Registrant and Le LGV Ltee, as Buyer.* (ix) Shareholders Agreement, dated March 8, 1988, by and among ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), as the Corporation, and Le LGV, Ltee and the Registrant, as the Shareholders.* (x) License Agreement, dated August 20, 1994, by and between ACTV Entertainment Corp. as Licensee and the Registrant as Licensor. (xi) Pledge Agreement, dated March 8, 1988, by and between ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), as the Pledgee, and Le LGV, Ltee, as the Pledgor.* (xii) Option Agreement, dated as of November 2, 1987, between the Registrant, as the corpora- tion, and Le LGV Ltee, as the Optionee.* (xiii) Letter agreement, dated November 29, 1988, with LGV, Ltee.* (xiv) Deleted. (xv) United States Patent for Interactive Cable Television System, number 4,264,925, dated
II-7 April 28, 1981.* (xvi) United States Patent for Dedicated Channel Interactive Cable Television System, number 4,264,924, dated April 28, 1981.* (xvii) United States Patent for Method for Expanding Interactive ACTV Displayable Choices for a Given Channel Capacity, number 4,573,072, dated February 25, 1986.* (xviii) United States Patent for Method for Providing A Targeted Profile Interactive CATV Display, number 4,602,279, dated July 22, 1986.* (xix) United States Patent for One Way Interactive multisubscriber Communication System number, 4,507,680, dated March 26, 1985.* (xx) United States Patent for Interactive Television System for Providing Full Motion Synched Compatible Audio/Visual Displays, number 4,847,698, dated July 11, 1989.* (xxi) United States Patent for Interactive Television System for Providing Full Motion Synched Compatible Audio/Visual Television Signals, number 4,847,700, dated July 11, 1989.* (xxii) United States Patent for Method for Providing an Interactive Full Motion Synched Compatible Audio/Visual Television Display, number 4,847,699, dated July 11, 1989.* (xxiii) Option Agreement, dated as January 1, 1989, by and between Jay M. Kaplowitz and the Registrant.* (xxiv) Revised Confirmatory Assignment dated October 31, 1989, by and between Michael J. Freeman and the Registrant.* (xxv) Confirmatory Assignment dated September 13, 1989, by and between Michael J. Freeman and the Registrant.* (xxvi) Termination and Settlement Agreement, dated June 11, 1985, by and among the Registrant, as the Company, and Michael Freeman, Berte Hirschfield, as the New Investors, and Catalyst I Partners, Nolan Bushnell and Catalyst Technologies, as the Former Investors.* (xxvii) Financing Agreement, dated June 11, 1985, by and among the Registrant, and Michael Freeman, Ph.D., Berte Hirschfield and Leonard Schaier, as the Investors.* (xxviii) Deleted. (xxix) Letter Agreement, dated June 11, 1985 by and among the Registrant, Berte Hirschfield, Michael Freeman and Prudential-Bache Securities, Inc.* (xxx) Deleted. (xxxi) Articles of Incorporation of ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), filed in the State of New York on March 8, 1988.* (xxxii) By-Laws of ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.)* (xxxiii) Form of 1989 Employee Incentive Stock Option Plan.* (xxxiv) Form of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan.* (xxxv) Form of 1989 Employee Non-qualified Stock Option Plan.* (xxxvi) Form of Amendment No. 1 to 1989 Employee Non-qualified Stock Option Plan.* (xxxvii) 1986 Non-qualified Stock Option Plan.* (xxxviii) Form of 1986 Non-qualified Stock Option Agreement.* (xxxix) Stock Option Agreement, dated as of August 1, 1989, by and between the Registrant and William C. Samuels.* (xl) Deleted. (xli) Option Agreement dated as of March 1, 1989 by and between David Reese and the Registrant.* (xlii) Deleted. (xliii) Deleted. (xliv) Deleted. (xlv) Deleted (xlvi) Deleted. (xlvii) Deleted.
II-8 (xlviii) Deleted. (xlix) Deleted. (l) Deleted. (li) Deleted. (lii) Option and Majority Rights Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liii) Convertible Note Purchase Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liii) Standstill Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liv) Common Stock Purchase Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lv) Security Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lvi) 8% Convertible Promissory Note, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lvii) Consulting and Option Agreement dated March 18, 1991, by and between the Registrant and Peterson Consulting.** (lviii) Partnership Agreement between ACTV Interactive, Inc. and Post Company-Newsweek Education, Inc. dated July 14, 1992.*** (lix) New Warrant Agreement between the Registrant, Josephthal Lyon & Ross Incorporated and certain persons dated April 1993.**** (lx) Agreement between the Registrant and Josephthal Lyon & Ross Incorporated dated April 1993.**** (lxi) US License Agreement dated June 8, 1993 between Videotron Technologies Ltd. and ACTV, Inc.***** (lxii) Foreign License Agreement dated June 8, 1993 between Le Groupe Videotron and ACTV, Inc.***** (lxiii) Stipulation of Settlement dated June 8, 1993 between Le Groupe Videotron and ACTV, Inc.***** (lxiv) Amendment to the Option Agreement dated March 17, 1992 dated June 14, 1993 between the Washington Post Company and ACTV, Inc.***** (lxv) Deleted. (lxvi) Partnership Interest Purchase Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxvii) Security Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxiii) Amendment to Standstill Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxix) Deleted (lxx) Employment Agreement dated November 10, 1994 between Dr. Michael J. Freeman and ACTV, Inc. (lxxi) Memorandum dated November 23, 1993 between the William Morris Agency and ACTV, Inc.****** (lxxii) Settlement Agreement dated April 25, 1994 among Nolan Bushnell, Catalyst Technologies and ACTV, Inc.**** (lxxiii) Deleted. (lxxiv) Agreement dated as of February 14, 1994 between Turner Educational Services, Inc. and ACTV, Inc.**** (lxxv) Agreement dated as of December 30, 1993 between Phoenix Learning Group and ACTV, Inc.**** (lxxvi) Agreement dated as of July 1, 1993 between Bergwall Productions and ACTV, Inc.****
II-9 (lxxvii) Agreement dated as of October 30, 1992 between The Hastey Pudding Puppet Co., and ACTV, Inc.**** (lxxviii) Agreement dated as of November 30, 1992 between AIMS Media and ACTV, Inc.**** (lxxix) Agreement dated as of January 15, 1992 between Agency for Instructional Technology and ACTV, Inc.**** (lxxx) Agreement dated December 21, 1992 between Takeoff/Video Educational Excellence and ACTV, Inc.**** (lxxxi) Agreement dated June 1, 1994 between Wescott Communications, Inc. and ACTV, Inc.**** (lxxxii) Deleted. (lxxxiii) Employment Agreement dated August 1, 1995 between the Company and William C. Samuels. ******* (lxxxiv) Employment Agreement dated August 1, 1995 between the Company and David Reese. ******* (lxxxv) Agreement dated August 16, 1995 between the Company and Cable News Network, Inc. ******* (lxxxvi) Option Agreement dated September 29, 1995, between the Company and Richard H. Bennett.+ (lxxxvii) Assignment dated September 29, 1995 between the Company and Richard H. Bennett.+ (lxxxviii) Employment Agreement dated as of December 15, 1995 between Bruce Crowley and ACTV.+ (lxxxix) Joint Venture Agreement dated as of December 1, 1995 between Earth Web, LLC and ACTV.+ (xc) Option Agreement dated October 31, 1994 between David Reese and ACTV, Inc. (xci) Option Agreement dated December 31, 1994, amended August 1, 1995, between William C. Samuels and ACTV, Inc. (xcii) Letter Agreement dated September 8, 1994 between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xciii) Option Agreement dated November 11, 1994, between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xciv) Option Agreement dated December 1, 1994, between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xcv) Private Placement Distribution Agreement dated November 11, 1994 between ETR & Associates, Inc. and ACTV, Inc. (xcvi) Agreement dated March 30, 1995 between General Instrument and ACTV, Inc. (xcvii) Technical Services Agreement dated May 1995 between David Sarnoff Research Center, Inc. and ACTV, Inc. (xcviii) Agreement dated August 18, 1995 between David Sarnoff Research Center, Inc. and ACTV, Inc. 23. Consents (i) Consent of Deloitte & Touche LLP (ii) Consent of Gersten, Savage, Kaplowitz & Curtin (contained in Exhibit 5) 24. Power of Attorney (Included on Company Signature Page) * Incorporated by reference from Form S-1 Registration Statement (File No. 33-34618) which became effective on May 4, 1990. ** Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1991. *** Incorporated by reference from the Company's Form 8-K dated July 24, 1991. **** Incorporated by reference from Form S-1 Registration Statement (File No. 33-61320), Post Effective Amendment No. 4 of which became effective on July 22, 1994. ***** Incorporated by reference from the Company's Form 8-K dated June 8, 1993. ****** Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1993. ******* Incorporated by reference from Form S-8 Registration Statement which became effective on October 4, 1995.
+ Previously Filed II-10 (b) Financial Statements and Schedules. The Financial Statements are included in the Prospectus, and Schedule 4 is included at the end of this Part II. All other Schedules are omitted for the reason that they are not required or are not applicable or the required information is shown in the financial statements or notes thereto. 17. UNDERTAKINGS. The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or in the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer, or controlling person of the Company in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Company will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-11 FINANCIAL STATEMENT SCHEDULES INDEBTEDNESS OF AND TO RELATED PARTIES-NON CURRENT
Balance Additions/ Balance Additions/ Balance Additions/ Balance Name of Person 12/31/91 Deletions 12/31/92 Deletions 12/31/93 Deletions 12/31/94 - -------------- -------- --------- -------- --------- -------- --------- -------- Catalyst Ventures $65,650 $0 $65,650 $0 $65,650 $65,650 $0 Nolan Bushnell 55,683 0 55,683 0 55,683 55,683 0 Berte Hirschfield 33,000 0 33,000 0 33,000 33,000 0 Michael Freeman 10,000 0 10,000 0 10,000 10,000 0 Freeman-Hirschfield Associates 34,400 0 39,400 0 39,400 39,400 0 ------ - ------ - ------ ------ - Total $203,733 $0 $203,733 $0 $203,733 $203,733 $0 ======== == ======== == ======== ======== ==
Note: Indebtedness of and to related parties-non current is reflected in the Company's balance sheet as follows:
December 31 1993 1994 ---- ---- Note Payable $150,000 $0 Due to related parties-above 203,733 0 Due to creditors 124,959 0 Interest Payable 231,102 0 ------- -- Repayable from Repayment Pool $709,794 $0
II-12 Statement of Differences The registered trademark symbol shall be expressed as ........ 'r' The trademark symbol shall be expressed as ................... 'tm' SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Pre-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized in the City of New York and State of New York on the 8th day of February, 1996. ACTV, INC. By: /s/ William C. Samuels -------------------------------------- William C. Samuels President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 2 to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- /s/ William C. Samuels - --------------------------- Chairman of the Board, President, February 8, 1996 William C. Samuels Chief Executive Officer and Director * - ---------------------------- Director and Executive Vice-President February 8, 1996 David Reese and President -- ACTV Entertainment, Inc. * - ------------------------------ Director, Executive Vice President -- February 8, 1996 Bruce Crowley Distance Learning and President - ACTV, Interactive, Inc. * - ------------------------------ Vice President, Chief Financial Officer February 8, 1996 Christopher C. Cline and Secretary * - ------------------------------ Director February 8, 1996 Jay M. Kaplowitz * - ------------------------------ Director February 8, 1996 Richard Hyman * - ------------------------------ Director February 8, 1996 Howard Squadron *By: /s/ William C. Samuels ----------------------- William C. Samuels Attorney-in-fact
EXHIBIT INDEX 3. (i)(a) Restated Certificate of Incorporation.* (b) Amendment to Certificate of Incorporation.****** (ii) By-Laws.* (iii) Form of Warrant Agreement by and between the Registrant and Continental Stock Transfer and Trust Company, as Warrant Agent.* (iv) Form of Underwriter's Warrant Agreement by and between the Registrant and the Underwriter.* (v) Intentionally Omitted.* 5. (i) Opinion of Gersten, Savage, Kaplowitz & Curtin 9. Voting Trust Agreements (i)-(xxi) Deleted. (xxii) Voting Agreement dated November 11, 1994, by and between William C. Samuels and Michael J. Freeman. (xxiii) Voting Trust Agreement dated March 10, 1994 by and among William C. Samuels, The Washington Post Company and ACTV, Inc. - formerly 10(lxix)****** 10. Material Contracts. (i) Deleted.* (ii) Lease, dated December 5, 1986, by and between the Registrant, as the Tenant, and Rockefeller Center Properties, as the Landlord.* (iii) Deleted. (iv) Deleted (v) Deleted. (vi) License Agreement, dated November 2, 1987, by and between the Registrant and Le LGV, Ltee with respect to Canada, Europe and the USSR.* (vii) Deleted. (viii) Stock Purchase Agreement, dated March 8, 1988, by and among ACTV Entertainment Corp.(formerly ACTV Entertainment Broadcast Corp.), the Registrant and Le LGV Ltee, as Buyer.* (ix) Shareholders Agreement, dated March 8, 1988, by and among ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), as the Corporation, and Le LGV, Ltee and the Registrant, as the Shareholders.* (x) License Agreement, dated August 20, 1994, by and between ACTV Entertainment Corp. as Licensee and the Registrant as Licensor. (xi) Pledge Agreement, dated March 8, 1988, by and between ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), as the Pledgee, and Le LGV, Ltee, as the Pledgor.* (xii) Option Agreement, dated as of November 2, 1987, between the Registrant, as the corpora- tion, and Le LGV Ltee, as the Optionee.* (xiii) Letter agreement, dated November 29, 1988, with LGV, Ltee.* (xiv) Deleted. (xv) United States Patent for Interactive Cable Television System, number 4,264,925, dated April 28, 1981.*
(xvi) United States Patent for Dedicated Channel Interactive Cable Television System, number 4,264,924, dated April 28, 1981.* (xvii) United States Patent for Method for Expanding Interactive ACTV Displayable Choices for a Given Channel Capacity, number 4,573,072, dated February 25, 1986.* (xviii) United States Patent for Method for Providing A Targeted Profile Interactive CATV Display, number 4,602,279, dated July 22, 1986.* (xix) United States Patent for One Way Interactive multisubscriber Communication System number, 4,507,680, dated March 26, 1985.* (xx) United States Patent for Interactive Television System for Providing Full Motion Synched Compatible Audio/Visual Displays, number 4,847,698, dated July 11, 1989.* (xxi) United States Patent for Interactive Television System for Providing Full Motion Synched Compatible Audio/Visual Television Signals, number 4,847,700, dated July 11, 1989.* (xxii) United States Patent for Method for Providing an Interactive Full Motion Synched Compatible Audio/Visual Television Display, number 4,847,699, dated July 11, 1989.* (xxiii) Option Agreement, dated as January 1, 1989, by and between Jay M. Kaplowitz and the Registrant.* (xxiv) Revised Confirmatory Assignment dated October 31, 1989, by and between Michael J. Freeman and the Registrant.* (xxv) Confirmatory Assignment dated September 13, 1989, by and between Michael J. Freeman and the Registrant.* (xxvi) Termination and Settlement Agreement, dated June 11, 1985, by and among the Registrant, as the Company, and Michael Freeman, Berte Hirschfield, as the New Investors, and Catalyst I Partners, Nolan Bushnell and Catalyst Technologies, as the Former Investors.* (xxvii) Financing Agreement, dated June 11, 1985, by and among the Registrant, and Michael Freeman, Ph.D., Berte Hirschfield and Leonard Schaier, as the Investors.* (xxviii) Deleted. (xxix) Letter Agreement, dated June 11, 1985 by and among the Registrant, Berte Hirschfield, Michael Freeman and Prudential-Bache Securities, Inc.* (xxx) Deleted. (xxxi) Articles of Incorporation of ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.), filed in the State of New York on March 8, 1988.* (xxxii) By-Laws of ACTV Entertainment Corp. (formerly ACTV Entertainment Broadcast Corp.)* (xxxiii) Form of 1989 Employee Incentive Stock Option Plan.* (xxxiv) Form of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan.* (xxxv) Form of 1989 Employee Non-qualified Stock Option Plan.* (xxxvi) Form of Amendment No. 1 to 1989 Employee Non-qualified Stock Option Plan.* (xxxvii) 1986 Non-qualified Stock Option Plan.* (xxxviii) Form of 1986 Non-qualified Stock Option Agreement.* (xxxix) Stock Option Agreement, dated as of August 1, 1989, by and between the Registrant and William C. Samuels.* (xl) Deleted. (xli) Option Agreement dated as of March 1, 1989 by and between David Reese and the Registrant.* (xlii) Deleted. (xliii) Deleted. (xliv) Deleted.
(xlv) Deleted (xlvi) Deleted. (xlvii) Deleted. (xlviii) Deleted. (xlix) Deleted. (l) Deleted. (li) Deleted. (lii) Option and Majority Rights Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liii) Convertible Note Purchase Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liii) Standstill Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (liv) Common Stock Purchase Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lv) Security Agreement, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lvi) 8% Convertible Promissory Note, dated March 17, 1992, by and between the Washington Post Company and the Registrant.*** (lvii) Consulting and Option Agreement dated March 18, 1991, by and between the Registrant and Peterson Consulting.** (lviii) Partnership Agreement between ACTV Interactive, Inc. and Post Company-Newsweek Education, Inc. dated July 14, 1992.*** (lix) New Warrant Agreement between the Registrant, Josephthal Lyon & Ross Incorporated and certain persons dated April 1993.**** (lx) Agreement between the Registrant and Josephthal Lyon & Ross Incorporated dated April 1993.**** (lxi) US License Agreement dated June 8, 1993 between Videotron Technologies Ltd. and ACTV, Inc.***** (lxii) Foreign License Agreement dated June 8, 1993 between Le Groupe Videotron and ACTV, Inc.***** (lxiii) Stipulation of Settlement dated June 8, 1993 between Le Groupe Videotron and ACTV, Inc.***** (lxiv) Amendment to the Option Agreement dated March 17, 1992 dated June 14, 1993 between the Washington Post Company and ACTV, Inc.***** (lxv) Deleted. (lxvi) Partnership Interest Purchase Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxvii) Security Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxiii) Amendment to Standstill Agreement dated March 11, 1994 between The Washington Post Company and ACTV, Inc.****** (lxix) Deleted (lxx) Employment Agreement dated November 10, 1994 between Dr. Michael J. Freeman and ACTV, Inc. (lxxi) Memorandum dated November 23, 1993 between the William Morris Agency and ACTV, Inc.****** (lxxii) Settlement Agreement dated April 25, 1994 among Nolan Bushnell, Catalyst Technologies.
and ACTV, Inc.**** (lxxiii) Deleted. (lxxiv) Agreement dated as of February 14, 1994 between Turner Educational Services, Inc. and ACTV, Inc.**** (lxxv) Agreement dated as of December 30, 1993 between Phoenix Learning Group and ACTV, Inc.**** (lxxvi) Agreement dated as of July 1, 1993 between Bergwall Productions and ACTV, Inc.**** (lxxxii) Deleted. (lxxxiii) Employment Agreement dated August 1, 1995 between the Company and William C. Samuels. ******* (lxxxiv) Employment Agreement dated August 1, 1995 between the Company and David Reese.******* (lxxxv) Agreement dated August 16, 1995 between the Company and Cable News Network, Inc.******* (lxxxvi) Option Agreement dated September 29, 1995, between the Company and Richard H. Bennett.+ (lxxxvii) Assignment dated September 29, 1995 between the Company and Richard H. Bennett.+ (lxxxviii) Employment Agreement dated as of December 15, 1995 between Bruce Crowley and ACTV.+ (lxxxix) Joint Venture Agreement dated as of December 1, 1995 between Earth Web, LLC and ACTV.+ (xc) Option Agreement dated October 31, 1994 between David Reese and ACTV, Inc. (xci) Option Agreement dated December 31, 1994, amended August 1, 1995, between William C. Samuels and ACTV, Inc. (xcii) Letter Agreement dated September 8, 1994 between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xciii) Option Agreement dated November 11, 1994, between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xciv) Option Agreement dated December 1, 1994, between Gerard Klauer Mattison & Co., Inc. and ACTV, Inc. (xcv) Private Placement Distribution Agreement dated November 11, 1994 between ETR & Associates, Inc. and ACTV, Inc. (xcvi) Agreement dated March 30, 1995 between General Instrument and ACTV, Inc. (xcvii) Technical Services Agreement dated May 1995 between David Sarnoff Research Center, Inc. and ACTV, Inc. (xcviii) Agreement dated August 18, 1995 between David Sarnoff Research Center, Inc. and ACTV, Inc.
23. Consents (i) Consent of Deloitte & Touche LLP (ii) Consent of Gersten, Savage, Kaplowitz & Curtin (contained in Exhibit 5) 24. Power of Attorney (Included on Company Signature Page) * Incorporated by reference from Form S-1 Registration Statement (File No. 33-34618) which became effective on May 4, 1990. ** Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1991. *** Incorporated by reference from the Company's Form 8-K dated July 24, 1991. **** Incorporated by reference from Form S-1 Registration Statement (File No. 33-61320), Post Effective Amendment No. 4 of which became effective on July 22, 1994. ***** Incorporated by reference from the Company's Form 8-K dated June 8, 1993. ****** Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1993. ******* Incorporated by reference from Form S-8 Registration Statement which became effective on October 4, 1995. + Previously Filed EX-5 2 EXHIBIT 5 [LETTERHEAD OF GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP] February 8, 1996 ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 Gentlemen: You have requested our opinion, as counsel for ACTV Inc., a Delaware corporation (the "Company"), in connection with pre-effective amendment no. 2 to the registration statement on Form S-1 (the "Registration Statement"), under the Securities Act of 1933 (the "Act"), being filed by the Company with the Securities and Exchange Commission. The Registration Statement relates to (i) an offering by the Company (the "Offering") of up to 2,500,000 shares (the "Company Shares") of common stock, par value $.10 (the "Common Stock"), and (ii) 3,850,000 shares of Common Stock (the "Security Holders' Shares"). Up to 122,855 of the Security Holders' Shares may be issued by the Company upon the exercise of options, warrants or pursuant to SARs that are currently outstanding and are not exercisable for a period of six months. Up to 3,727,145 of the Security Holders' Shares may be sold by security holders who have acquired or will acquire such shares from the Company (i) upon exercise of currently exercisable options and warrants, and pursuant to SARs, (ii) upon issuance to consultants pursuant to existing agreements, and (iii) upon issuance in connection with certain financings. We have examined such records and documents and made such examinations of law as we have deemed relevant in connection with this opinion. It is our opinion that when there has been compliance with the Act, the Company Shares and the Security Holders Shares, when issued, delivered, and paid for, will be fully paid and nonassessable. No opinion is expressed herein as to any laws other than the laws of the State of New York and of the United States. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ Gersten, Savage, Kaplowitz & Curtin, LLP GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP EX-10 3 EXHIBIT XC OPTION AGREEMENT OPTION AGREEMENT dated October 31, 1994 between ACTV, Inc., a Delaware corporation (the "Corporation") and David Reese (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 40,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledge, the parties hereby agree as follows: SECTION 1. Option to Purchase Common Stock. a. Subject to Section 12 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 40,000 Option Shares, at a purchase price of $3.50 per Option Share (the "Option Price"). The Employee's right and option to purchase the Option Shares shall vest January 1, 1996. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on January 1, 2002. b. The Option may be exercised by the Employee by delivery to the Corporation of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate of other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Employee of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. Representations and Warranties of The Holder. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities ACT"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. Reorganization; Mergers; Sales; Etc. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. Adjustment of Option Shares and Option Price. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. 2 (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. Termination of the Options. a. Termination of Options in General. Subject to subsections (b) - (d) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after the earlier of January 1, 2002 or three months after the date of termination of employment, except in the case of retirement, death or disability. b. Option Rights Upon Retirement. If the Employee retires from the employment of the Corporation or any affiliate or subsidiary in accordance with the Corporation's retirement policy of the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, in its discretion, may allow the Option to be fully exercised, at any time within one year after the date of such termination, to the extent that the Employee was entitled to exercise the Option at the date of his retirement. c. Option Rights Upon Disability. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, in its discretion, may allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. d. Death of the Optionee. In the event that an Employee shall die while he is an employee of the Corporation (or within three (3) months after the termination of such employment) and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option, or within one year after the date of death, whichever is earlier. 3 SECTION 6. Piggyback Registration. a. If, at any time commencing January 1, 1997 and expiring January 1, 2002, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger of pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of 4 counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. Transfer of Option; Successors And Assigns. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas Suite 2401 New York, New York 10020 Attention: William C. Samuels, President & CEO With a copy to: Jay M. Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Curtin 575 Lexington Avenue New York, New York 10022 If to the Employee, to: David Reese 30 Maclay Road Montville, New Jersey 07045 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. 5 SECTION 10. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. Amendments and Modifications. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. SECTION 12. Termination. In addition to the termination provisions set forth in Section 1 hereof, the Option shall terminate and the Option shall no longer be exercisable on January 1, 2002. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: WILLIAM C. SAMUELS ___________________________ William C. Samuels Chief Executive Officer 6 EX-10 4 EXHIBIT XCI OPTION AGREEMENT OPTION AGREEMENT dated December 31, 1994, amended August 1, 1995, between ACTV, Inc., a Delaware corporation (the "Corporation") and William C. Samuels (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 80,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledge, the parties hereby agree as follows: SECTION 1. Option to Purchase Common Stock. a. Subject to Section 12 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 80,000 Option Shares, at a purchase price of $3.50 per Option Share (the "Option Price"). The Employee's right and option to purchase the Option Shares shall vest August 1, 1995. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on January 1, 2002. b. The Option may be exercised by the Employee by delivery to the Corporation of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate of other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Employee of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. Representations and Warranties of The Holder. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities ACT"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. Reorganization; Mergers; Sales; Etc. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. Adjustment of Option Shares and Option Price. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the 2 number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. Termination of the Options. a. Termination of Options in General. Subject to subsections (b) - (d) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after the earlier of January 1, 2002 or three months after the date of termination of employment, except in the case of retirement, death or disability. b. Option Rights Upon Retirement. If the Employee retires from the employment of the Corporation or any affiliate or subsidiary in accordance with the Corporation's retirement policy of the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, in its discretion, may allow the Option to be fully exercised, at any time within one year after the date of such termination, to the extent that the Employee was entitled to exercise the Option at the date of his retirement. c. Option Rights Upon Disability. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, in its discretion, may allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. d. Death of the Optionee. In the event that an Employee shall die while he is an employee of the Corporation (or within three (3) months after the termination of such employment) and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option, or within one year after the date of death, whichever is earlier. SECTION 6. Piggyback Registration. a. If, at any time commencing January 1, 1997 and expiring January 1, 2002, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger of pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the 3 Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. Transfer of Option; Successors And Assigns. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, 4 assigns and transferees. SECTION 8. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas Suite 2401 New York, New York 10020 Attention: Dr. Michael J. Freeman, Chairman With a copy to: Jay M. Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Curtin 575 Lexington Avenue New York, New York 10022 If to the Employee, to: William C. Samuels 1 West 67th Street New York, New York 10023 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. Amendments and Modifications. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. 5 SECTION 12. Termination. In addition to the termination provisions set forth in Section 1 hereof, the Option shall terminate and the Option shall no longer be exercisable on January 1, 2002. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: CHRISTOPHER C. CLINE ___________________________ Christopher C. Cline Chief Executive Officer 6 EX-10 5 EXHIBIT XCII [GERARD KLAUER LETTERHEAD] September 8, 1994 ACTV, Inc. 1270 Avenue of the Americas Rockefeller Center, Suite 2401 New York, NY 10020 Attention: Chief Executive Officer Gentlemen: This letter will confirm our mutual agreement to terminate, effective immediately, the letter agreement dated July 21, 1994 (the 'Engagement Letter') between ACTV, Inc. (the 'Company') and Gerard Klauer Mattison & Co., Inc. ('GKM'). Subject to our mutual consent, GKM may, subsequent to the date hereof, act as financial advisor to the Company on a case-by-case basis. In such event, unless otherwise agreed to in writing, GKM shall be compensated by the Company in accordance with the fee schedule set forth in paragraph 2(b) of the Engagement Letter. Please acknowledge your understanding and agreement with the foregoing by signing a copy of this letter in the space indicated below. Very truly yours, GERARD KLAUER MATTISON & CO., INC. By: DOMINIC PETITO __________________________________ ACKNOWLEDGED AND AGREED ACTV, Inc. By: WILLIAM C. SAMUELS __________________________________ [GERARD KLAUER MATTISON & CO., INC. LETTERHEAD] July 21, 1994 ACTV, Inc. 1270 Avenue of the Americas New York, New York 10020 Attention: Chief Executive Officer Gentlemen: This letter agreement confirms the agreement of ACTV, Inc. (the "Company") to engage Gerard Klauer Mattison & Co., Inc. ("GKM") as the Company's financial advisor upon the terms and conditions set forth below. 1. The Company desires to retain GKM as the Company's financial advisor, on the terms and conditions set forth below in this letter agreement. The Company shall engage GKM for the period from the date of this letter agreement through and including the date which is six months after the date hereof (the "Initial Period"), subject to automatic renewal for an additional six-month period unless either party shall have provided written notice to the other no later than 30 days prior to the last day of the Initial Period of its intention not to renew the term beyond the Initial Period (provided, that, subject to Section 7 below, either party shall have the right to terminate this letter agreement earlier on at least 30 days' written notice to the other (the term of this letter agreement, the "Term")), to serve as financial advisor to the Company (which term, for purposes of Sections 1, 2 and 3, shall include the Company and its subsidiaries and affiliates and any partnership or venture in which the Company or such subsidiaries or affiliates participates), subject to the parenthetical clause in the first sentence of this Section 1, and to render such financial advice as may be agreed to by the Company and GKM with respect to all financings by the Company, whether involving debt or equity (including public underwritten offerings, for which GKM shall be offered the opportunity to serve as book-running lead manager), merger and acquisition or disposition transactions involving the Company and other transactions involving the formation by the Company of or investment by the Company in any partnerships or joint ventures, the licensing of any intellectual property or similar rights by the Company, or the formation of any strategic alliances in which the Company participates. The services to be provided hereunder by GKM shall be on terms and conditions satisfactory to each of the Company and GKM and GKM shall not be under any obligation to consummate any Transaction (as hereinafter defined) hereunder; it being understood that any Transactions in which GKM participates shall be on a best efforts basis and GKM shall not be deemed to have provided any commitment to raise any funds by virtue of its engagement hereunder. 2. (a) For GKM's services hereunder, the Company agrees to pay fees to GKM in cash as follows: (i) upon execution of this letter agreement, a non-refundable fee of $25,000; and (ii) upon the earlier to occur of (a) the last day of the Initial Period and (b) the consummation of any Transaction resulting in gross proceeds to the Company or having a value (as mutually reasonably determined by the Company and GKM) of $5 million or greater, as the case may be (the "Trigger Date"), a non-refundable fee of $50,000. In addition, (A) within 10 days of the date hereof, the Company will issue to GKM a warrant (the "Initial Warrant") to acquire 30,000 shares of common stock, par value $.10 per share, of the Company (the "Common Stock"), with an exercise price of $5.50 per share, which shall be exercisable from and after the date hereof and for a period of five years thereafter and which shall contain other customary provisions, including customary anti-dilution protection and registration rights, and (B) on the Trigger Date, the Company shall issue to GKM a warrant (the "Subsequent Warrant"; together with the Initial Warrant, the "Warrants") to acquire 70,000 shares of Common Stock, which shall be exercisable from and after the date of issuance thereof and for a period of five years thereafter otherwise having the same terms and conditions as the Initial Warrant. The number of shares covered by the Warrant and the exercise price per share shall also be subject to customary anti-dilution protection between the date hereof and the date of issuance. GKM acknowledges that the Warrants and the underlying shares of common stock will not, upon issuance thereof, have been registered under the Securities Act of 1933 and may only be transferred or sold in compliance with such act and applicable state securities laws. (b) In the event that the Company (i) obtains any financing, whether in connection with the issuance of any equity, debt, convertible or exchangeable securities or otherwise, (ii) consummates any acquisition of any of the capital stock (or equivalent equity interests) or assets of any other company, entity, venture or business, (iii) disposes of any of its property or assets (including any capital stock of any subsidiary -2- or equity interest in any partnership or venture) or (iv) licenses to any other person or entity rights in or to any intellectual property possessed by the Company (including patent, trademark, copyright, know-how, trade secret or other rights) (each, a "Transaction"), (A) during the Term or (B) within one year thereafter with or involving any person or entity, in each case, initially contacted by, or introduced to the Company by, GKM, or with whom the Company had any discussion in which GKM participated during the Term relating to any Transaction or the possibility of consummating any Transaction, the Company shall, upon consummation of any such Transaction, pay to GKM an amount equal to: (x) in the case of clause (i) above, (A) such amount as shall be customary at the time for similar transactions in the case of a public offering (which shall not be less than 6 1/2% of the gross proceeds received by the Company in such transaction) or (B) 6 1/2% of the gross proceeds received by the Company in such Transaction in the case of a private placement or other offering; or (y) in the case of clauses (ii) or (iii) above, such amount (which shall not be less than 3% of the aggregate value of such Transaction (as mutually reasonably determined by the Company and GKM) which the parties mutually determine shall be fair and equitable for such Transaction in light of then current market conditions and consistent with amounts then being paid in similar transactions; or (z) in the case of clause (iv) above, (A) a reasonable percentage (as shall be agreed upon by the Company and GKM which is consistent with such amounts then being paid in similar transactions) of any lump sum, or up-front or similar one-time or periodic payment not denominated as a royalty payment and (B) an amount equal to 5% of the gross amount of royalties, license or similar payments received by the Company during the first three years of the term of any payments of such fees, in each case, as received by the Company (or such other entity); it being understood that in the event that all or a portion of any such consideration or value consists of non-cash consideration, the Company shall pay to GKM the foregoing applicable amounts based upon the fair market value thereof, as determined in good faith by the Board of Directors of the Company and GKM. In addition, in the case of clause (b)(i) above, the Company shall issue to GKM warrants to acquire shares of Common Stock (substantially on the terms of the Warrants; provided, that in the case of a public offering of equity securities, such warrants shall have an exercise price of 110% of the price paid -3- by the public in such offering) having a value equal to 10% of the consideration received by the Company on a fully diluted basis (after giving effect to such Transaction). (c) The Company will reimburse GKM, upon the consummation of any Transaction, at the expiration of the Term and upon GKM's request from time to time, for the expenses reasonably incurred by GKM in entering into and performing services pursuant to this letter agreement, including without limitation, travel and similar expenses and the fees and disbursements of GKM's counsel. GKM will consult with the Company prior to any significant expenditure of any travel or legal expenses. 3. In the event that any Transaction resulting in gross proceeds to the Company or having a value (as mutually reasonably determined by the Company and GKM) of $2 million or greater is consummated (i) during the Term or (ii) within one year thereafter with or involving any person or entity, in each case initially contacted by, or introduced to the Company by, GKM, or with whom the Company had any discussion in which GKM participated during the Term relating to any Transaction or the possibility of consummating any Transaction during the Term, the Company shall, for a period of two years after the consummation of any such Transaction, retain GKM as its exclusive financial advisor on customary terms and conditions and shall offer GKM the opportunity, on an exclusive basis, to serve as book-running lead managing underwriting in the case of any underwritten public offerings (it being understood that in such event, GKM shall have the right to determine in its sole discretion whether to form a syndicate of underwriters in connection therewith and, if so, the identity of the participants therein). The Company does not intend to commence any public offering of securities prior to May 1, 1995. Except as set forth on Schedule 1 hereto, the Company has not entered into any financial advisory or similar engagements with any person or entity which are currently in effect and the Company shall not enter into any such arrangements with any person or entity other than GKM during the Term. 4. The fees contemplated by this letter agreement do not give effect to the rendering of fairness or similar opinions. If the need for a fairness or similar opinion does arise during the Term or within one year thereafter, the Company agrees to enter into discussions with GKM at that time to reach a mutually satisfactory arrangement with respect thereto. The Company agrees to retain GKM to render such services on terms as shall be mutually agreed to by GKM and the Company. 5. In the event that GKM becomes involved in any capacity in any action, proceeding, investigation or inquiry in connection with any advice rendered pursuant to this letter agreement or otherwise arising out of its engagement or the matters contemplated by this letter agreement, the Company will reimburse GKM for its legal and other fees and disbursements -4- (including without limitation, the cost of any investigation and preparation) as they are incurred by GKM in connection therewith. The Company also agrees to indemnify GKM and hold it harmless against any losses, costs, expenses, claims, damages or liabilities in connection with any matter referred to in this letter agreement or arising out of the matters contemplated by this letter agreement, unless it shall be finally judicially determined that such losses, costs, expenses, claims, damages or liabilities arise solely out of the gross negligence or bad faith of GKM in performing the services which are the subject of the letter agreement; and if such indemnification were for any reason not to be available, to contribute to the losses, costs, expenses, claims, damages and liabilities involved in the proportion that the Company's interest bears to GKM's interest in the matters contemplated by this letter agreement (it being understood that if any Transaction is consummated, GKM's interest in such matters shall not exceed the aggregate fees paid to GKM hereunder as percentage of the aggregate dollar amount (or value) of any such Transaction). For purposes of this Section 5 and Section 6 below, GKM shall include GKM, and its controlling persons (within the meaning of the Securities Exchange Act of 1934) and their respective affiliates and their respective directors, officers, employees and agents. The foregoing agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise. 6. None of (i) the name of GKM, (ii) any advice rendered by GKM to the Company or (iii) any communication from GKM in connection with the services performed by GKM pursuant to this letter agreement will be quoted or referred to orally or in writing by the Company or any of its subsidiaries or affiliates or any of their respective directors, officers, employees or agents, without, in each case, GKM's prior written authorization. The Company understands that in rendering services hereunder GKM will be relying, without independent verification, on the accuracy and completeness of all information that is or may be furnished to GKM by or on behalf of the Company or any other person that may furnish information to GKM, and (a) GKM will not in any respect be responsible for the accuracy or completeness thereof and (b) the Company will indemnify and hold GKM harmless from any loss, cost, expense, claim, damage or liability resulting from the inaccuracy of any such information. 7. Notwithstanding any termination or expiration of the Term, the Company shall be obligated to Pay to GKM (a) any fees referred to in Section 2 and (b) expenses incurred by GKM as a result of services rendered prior to the date of the termination or expiration, and Sections 5 and 6 hereof shall remain operative and in full force and effect. 8. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. Each party -5- hereto irrevocably submits to the exclusive jurisdiction of any State or Federal court sitting in the County, City and State of New York over any dispute arising from this letter agreement and waives the requirement that any such proceeding be tried to a jury. 9. This letter agreement shall be binding upon the Company and GKM and the successors and assigns of both and any successor of any substantial portion of the Company's and GKM's respective businesses and/or assets. No party other than the Company and GKM (as defined in Section 5) shall be deemed a beneficiary of this letter agreement or be entitled to enforce any rights or remedies hereunder. If the foregoing correctly sets forth our understanding, please indicate your acceptance hereof in the space provided below, at which time this letter agreement will constitute a binding agreement between us. Very truly yours, Gerard Klauer Mattison & Co., Inc. By: DOMINIC PETITO ------------------------------- Name: Title: Accepted and agreed as of the date first above written: ACTV, Inc. By: W.C. SAMUELS ------------------------------ Name: Title: -6- SCHEDULE 1 WALLER CAPITAL Josephthal Lyon & Ross Incorporated Wesfield Financial Corporation Cameron Associates, Inc. EX-10 6 EXHIBIT XCIII OPTION AGREEMENT OPTION AGREEMENT dated November 11, 1994 between ACTV, Inc., a Delaware corporation (the "Corporation") and Gerard Klauer Mattison & Co. Inc. (the "Company"). The Corporation desires to grant to the Company the right and option to purchase up to 30,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledge, the parties hereby agree as follows: SECTION 1. Option to Purchase Common Stock. a. Subject to Section 12 hereof, the Corporation hereby grants to the Company an option (the "Option") to purchase from the Corporation 30,000 Option Shares, at a purchase price of $5.50 per Option Share (the "Option Price"). The Company's right and option to purchase the Option Shares shall vest on November 15, 1994. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on November 15, 1997. b. The Option may be exercised by the Company by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Company's intention to exercise the Option, the date on which the Company proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Company, the Company shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate of other instrument registered in the name of the Company, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Company of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. Representations and Warranties of The Holder. The Company hereby represents and warrants to the Corporation that in the event the Company acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Company understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities ACT"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. Reorganization; Mergers; Sales; Etc. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Company would have been entitled if the Company had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. Adjustment of Option Shares and Option Price. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. 2 (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. Termination of the Options. a. Termination of Options in General. The Option granted hereby shall terminate and the Option shall no longer be exercisable after November 15, 1997. SECTION 6. Piggyback Registration. a. If, at any time commencing August 15, 1995 and expiring November 15, 1997, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger of pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Company of its intention to do so. If the Company notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Company the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Company the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Company will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Company will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. 3 d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Company, provided that the Corporation will pay, the costs and expenses of Company's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. Transfer of Option; Successors And Assigns. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: William C. Samuels, President and CEO With a copy to: Gersten, Savage, Kaplowitz & Curtin 575 Lexington Avenue New York, New York 10022 Attention: Jay M. Kaplowitz, Esquire If to the Company, to: Gerard Klauer Mattison & Co., Inc. 529 Fifth Avenue New York, NY 10017 Attention: Dominic Petito 4 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. Amendments and Modifications. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. SECTION 12. Termination. In addition to the termination provisions set forth in Section 1 hereof, the Option shall terminate and the Option shall no longer be exercisable on November 15, 1997. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: WILLIAM C. SAMUELS ______________________ William C. Samuels President 5 EX-10 7 EXHIBIT XCIV OPTION AGREEMENT OPTION AGREEMENT dated December 1, 1994 between ACTV, Inc., a Delaware corporation (the "Corporation") and Gerard Klauer Mattison & Co. Inc. (the "Company"). The Corporation desires to grant to the Company the right and option to purchase up to 5,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledge, the parties hereby agree as follows: SECTION 1. Option to Purchase Common Stock. a. Subject to Section 12 hereof, the Corporation hereby grants to the Company an option (the "Option") to purchase from the Corporation 5,000 Option Shares, at a purchase price of $5.50 per Option Share (the "Option Price"). The Company's right and option to purchase the Option Shares shall vest on December 1, 1994. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 1, 1997. b. The Option may be exercised by the Company by delivery to the Corporation of a written notice (the "Option Notice"), which Option Notice shall state the Company's intention to exercise the Option, the date on which the Company proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Company, the Company shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate of other instrument registered in the name of the Company, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Company of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. Representations and Warranties of The Holder. The Company hereby represents and warrants to the Corporation that in the event the Company acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Company understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities ACT"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. Reorganization; Mergers; Sales; Etc. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Company would have been entitled if the Company had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. Adjustment of Option Shares and Option Price. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the 2 number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. Termination of the Options. a. Termination of Options in General. The Option granted hereby shall terminate and the Option shall no longer be exercisable after December 1, 1997. SECTION 6. Piggyback Registration. a. If, at any time commencing August 15, 1995 and expiring December 1, 1997, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger of pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Company of its intention to do so. If the Company notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Company the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Company the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Company will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Company will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. 3 d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Company, provided that the Corporation will pay, the costs and expenses of Company's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. Transfer of Option; Successors And Assigns. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: William C. Samuels, President and CEO With a copy to: Gersten, Savage, Kaplowitz & Curtin 575 Lexington Avenue New York, New York 10022 Attention: Jay M. Kaplowitz, Esquire If to the Company, to: Gerard Klauer Mattison & Co., Inc. 529 Fifth Avenue New York, NY 10017 Attention: Dominic Petito or to such other address as the party to whom notice is to be 4 given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. Amendments and Modifications. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. SECTION 12. Termination. In addition to the termination provisions set forth in Section 1 hereof, the Option shall terminate and the Option shall no longer be exercisable on December 1, 1997. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: WILLIAM C. SAMUELS ______________________ William C. Samuels President 5 EX-10 8 EXHIBIT XCV PRIVATE PLACEMENT DISTRIBUTION AGREEMENT This Agreement made this day of November 1994 by and between ACTV, Inc., a Delaware Corporation (hereinafter referred to as 'ACTV') with its principal offices located at 1270 Avenue of the Americas, New York, New York 10020; and ETR & Associates, Inc., a Delaware Corporation (hereinafter referred to as 'ETR') located at 19 Spear Road, Suite 308, Ramsey, New Jersey 07466. WITNESSETH WHEREAS, ACTV is a 'reporting issuer' within the meaning of Section 902(1) of Regulation S, 17 CFR Section 240.901 et seq. promulgated under the Securities Act of 1933 ('Regulation S') which files reports with the U.S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the 'Exchange Act') and whose stock is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ Small Cap) under the symbol 'IATV'. WHEREAS, ETR is acting as a 'distributor' within the meaning of Section 902(c) of Regulation S; and WHEREAS, ETR desires to assist ACTV in obtaining equity capital pursuant to an offering conducted in compliance with Regulation S upon the terms and conditions set forth herein; NOW THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows: I. PRIVATE PLACEMENT WARRANTIES AND COVENANTS 1.01 ETR shall use its 'best efforts' to offer and sell up to $300,000 worth of ACTV Common Stock, (the 'Securities') in an offering conducted pursuant to Section 902 of Regulation S. The offering will consist of approximately 100,000 shares of common stock to be sold at a discounted share price of approximately $3.00 per share. If the offering price per share is less than this amount, ACTV must give its approval of this lower pricing. 1.02 ETR shall ensure compliance with Regulation S and shall send each purchaser a confirmation or other notice to the purchaser stating that the purchaser is subject to the same restrictions on offers and sales as ETR pursuant to Section 903(c)(2)(IV) of Regulation S. 1.03 ETR agrees that all offers and sales of the Securities prior to the expiration of the forty (40) day restricted period specified in Section 903(c)(2) of Regulation S shall be made only in accordance with the provisions of Section 903 and 904 of Regulation S as applicable; pursuant to registration of the Securities under the Securities Act of 1933 (the 'Securities Act'), or pursuant to an available exemption from registration under the Securities Act. 1.04 ETR agrees that any offering materials or documents (except 1934 Act filings and press releases) used in connection with offers and sales of Securities, prior to the expiration of the restricted period specified in Section 903(c)(2) of Regulation S shall include statements to the effect that the Securities have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. persons (other than distributors as that term is defined under Section 902(c) of Regulation S) unless the Securities are registered under the Securities Act, or an exemption from registration requirements of the Securities Act is available. Such statements shall appear on all materials as provided under Section 902(h)(2)(i), (ii) and (iii) of Regulation S. 1.05 ETR shall advise ACTV of any legends or restrictions required by foreign countries, if any, pertaining to the Securities which ACTV shall cause to be placed on the certificates representing the Securities; and ETR shall otherwise take all steps necessary to ensure that any offers and sales made pursuant to this Agreement comply with the laws and regulations of all foreign regulatory and/or self-regulatory authorities. 1.06 ACTV acknowledges that ACTV's counsel must prepare a legal opinion to authorize the transfer agent to issue shares of ACTV's Common Stock with the following restrictive legend: 'These shares have been issued pursuant to Regulation S as an exemption to the registration provisions under the Securities Act of 1933, as amended. These shares cannot be transferred, offered or sold in the U.S. or to U.S. persons (as defined in Regulation S) until after , 1994 (Forty-one days after closing).' 1.07 ACTV shall maintain its status as a corporation in good standing and a reporting issuer, operating in accordance with its most recent reports filed under the Exchange Act and provided to ETR. 1.08 ETR shall insure that at the time the buy order is originated for any of the Securities covered by the Agreement, the buyer is outside the United States. Also, the offering will be restricted to a maximum of three qualified offshore subscribers. 1.09 ETR shall insure that no directed selling efforts shall be made in the United States by it, its affiliates, or any person acting on its behalf in connection with the offer and sale of the Securities during the restricted period. The term 'directed selling efforts' means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of conditioning the market in the United States for the Securities. This would include the solicitation of offers to purchase and or sell the Securities from persons in the United States. 1.10 ACTV shall promptly issue certificates representing the Securities upon notice by Escrow Agent that payment has been received, accompanied by a Subscription Agreement executed by a foreign purchaser, in the form attached hereto in Exhibit A. II. COMPENSATION 2.01 ACTV hereby agrees to compensate ETR for its services 10% of the gross proceeds received by ACTV. ACTV also agrees to compensate ETR for any travel or other reasonable out of pocket expenses related to the offering. 2.02 All subscriptions received by ETR will be directed to the Attorney Trust Account of Harley & Deickler, Attn: Colin Harley, Esq./as Escrow Agent. ACTV agrees to pay for all wire transfer fees and miscellaneous legal fees incurred by counsel. Each time that ACTV delivers Securities in accordance to Regulation S, in the name of each subscriber, the proceeds will be immediately delivered to ACTV in a certified check or wire, less a one-half percent (0.5%) escrow fee to Harley & Deickler, and the 10% fee to ETR as set forth in 2.01 above. III INDEMNIFICATION 3.01 ETR and ACTV agree to indemnify and hold harmless the escrow agent from any and all claims, liabilities, losses, actions, suits or proceedings, at law or in equity, that it may incur or with which it may be threatened by reason of its acting as escrow agent as described herein (including but not limited to expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever); provided, however, that the provisions of this paragraph shall not apply in the event of any claim, liability, loss, action, suit, or proceeding resulting from the breach of the Escrow Agent of any material provision of this Agreement or from its gross negligence or willful misconduct. 3.02 ACTV agrees to indemnify and hold harmless ETR, its directors and each person, if any, who controls or is employed by ETR within the meaning of Section 15 of the Securities Act of 1933 as follows: a. Against any loss, liability, claim, damage and expense arising out of (including but not limited to expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever based upon) any untrue or alleged untrue statement of a material fact contained in the offering materials (as amended or supplemented) furnished to ETR by ACTV, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading unless such statement or omission was made in reliance upon and in conformity with written information furnished to ACTV by ETR expressly for use in the offering materials or any amendment or supplement thereof; and b. Against any loss, liability, claim, damage and expense to the extent of the aggregate amount paid in settlement of any litigaion commenced or threatened, or of any claim based upon any untrue statement or omission or any alleged untrue statement or omission (including but not limited to expenses reasonably incurred in investigating, preparing or defending against any such litigation or claim) if such settlement is effected with the written consent of ACTV. 3.03 ETR agrees to indemnify and hold harmless ACTV, its directors, the attorney for ACTV who prepares the legal opinion in connection with the Regulation S offering, and each person, if any who controls or is employed by ACTV within the meaning of Section 15 of the Securities Act as follows: a. Against any loss, liability, claim, damage and expense arising out of (including but not limited to expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever based upon) ETR's violation or alleged violation of Regulation S and any other applicable law or any untrue or alleged untrue statement of a material fact contained in the offering materials, if any, (as amended and supplemented) executed by ETR, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission was made in the offering materials or in any other offering documentation in reliance upon and in conformity with written information furnished to ACTV by ETR specifically for use in the preparation thereof; and b. Against loss, liability, claim, damage and expense to the extent of the aggregate amount paid in settlement of any litigation commenced or threatened, or of any claim based upon by any untrue statement or omission of any alleged untrue statement or omission (including but not limited to expenses reasonable incurred in investigating, preparing or defending against any such litigation or claim) if any settlement is effected with the written consent of ETR. IV Termination 4.01 This offering will terminate at 5:00pm Eastern Standard Time on November 25, 1994, unless extended by all the parties to this Agreement. V. Governing Law 5.01 This Agreement is binding on all parties, as well as on their successors, assignees and representatives, and constitutes the entire Agreement between the parties. This Agreement may be modified or amended solely by a written agreement executed by the parties hereto, and may be executed in counterparts. 5.02 The parties shall resolve any dispute arising hereunder before an arbitrator pursuant to the rules of the American Arbitration Association and each party shall bear their own attorney's fees and costs of such arbitration. Disputes under this agreement shall be governed by the laws of the State of New York. VI Notices 6.01 All notices and communications regarding this Agreement shall be sent to the following: If to ACTV: Mr. William C. Samuels President ACTV, Inc. 1270 Avenue of the Americas New York, New York 10020 If to ETR: Mr. Robert E. Lee President ETR & Associates, Inc. 19 Spear Road, Suite 308 Ramsey, NJ 07446 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have executed this Agreement: ETR & ASSOCIATES, INC. By: ROBERT E. LEE 11-11-94 ................................... Robert E. Lee, President ACTV, INC. By: WILLIAM C. SAMUELS ................................... William C. Samuels, President EX-10 9 EXHIBIT XCVI [LOGO] - ------------------------------------------------------------------------------- Executive Office 1270 Avenue of the Americas Suite 2401 Rockefeller Center New York, NY 10020 (212) 262-2570 Fax: (212) 459-9548 March 30, 1995 Mr. Robert M. King Director, Private Networks General Instrument 6262 Lusk Boulevard San Diego, CA 92121 Dear Bob, The following will serve as a letter of understanding between our two companies regarding the interoperability of ACTV's interactive, individualized distance learning unit and DigiCipher. Both ACTV and General Instrument believe that there will be tremendous growth in the private distance learning network business and the value add individualized interactivity affords for better quality content development. ACTV and General Instrument also believe in the migration by these networks to digitally delivered content. ACTV, Inc. will fund the non-recurring engineering, NRE, required to make the ACTV interactive distance learning unit and General Instrument's DigiCipher system compatible. The NRE development work will be undertaken by CADSA, Inc. of Alvin, Texas and the NRE project will be under the direct supervision of Dr. Bartus H. Batson of CADSA. It is estimated that the NRE will be complete during the fourth calendar quarter of 1995, Q4. The NRE will result in an external interface device which enables the DigiCipher system to support ACTV functionality. The device, to be called the DigiChipher/ACTV Distance Learning Unit, will initially be manufactured by the manufacturer of ACTV's distance learning unit, KDI Precision Products, of Cincinnati, Ohio. However, General Instrument will be given the opportunity to manufacture this device at any time, later on. Presumably, the circuitry necessary to support ACTV functionality could eventually be incorporated into the DigiCipher decoders. ACTV and General Instrument will work together to identify and sell potential clients on the merits of digitally delivered, interactive and individualized distance learning programming. We look forward to providing value added functionality through the DigiCipher encoders. We feel that there is a tremendous potential to developing a large worldwide business together. Sincerely, Agreed to and accepted by: BRUCE J. CROWLEY ROBERT M. KING Bruce J. Crowley Robert M. King President, Distance Learning Director, Business Development EX-10 10 EXHIBIT XCVII David Sarnoff Research Center, Inc. / CN5300 / Princeton, NJ 08543-5300 (609) 734-2300 / FAX (609) 734-2004 TECHNICAL SERVICES AGREEMENT ACTV: ACTV'tm', Inc. 1270 Avenue of the Americas Rockefeller Center, Suite 2401 New York, NY 10020 Attention: William C. Samuels This Agreement describes the terms and conditions for the work of David Sarnoff Research Center (Sarnoff) in providing technical services to ACTV'tm', Inc. (ACTV) based on the following Statement of Work and Terms and Conditions. Objective Sarnoff shall supply technical consultation to ACTV, to confirm and help ACTV convince cable operators and set-top-box manufacturers that the ACTV Individualized Television service is compatible with their current consumer hardware. Statement of Work: 1. Receive and analyze all documentation on ACTV System from ACTV. This documentation would include block diagrams, schematics, documented ROM code, service specifications, audio and video performance specifications, and other items as available. 2. Receive and analyze documentation for cable-equipment for which ACTV Individualized Television is to be qualified. 3. Participate in meetings that ACTV conducts with designated cable operators and equipment suppliers for the purpose of determining compatibility. 4. During the period of this work, spend up to two (2) full work-days in the NYC offices of ACTV, plus prearranged business meetings as required. Period of Performance: May 15, 1995, through November 15, 1995, unless extended by written agreement. Price and Payment: Sarnoff's estimated price for the services described herein shall not exceed $66,000 on a best efforts cost reimbursable basis for the Period of Performance without prior written approval of ACTV. This support will include a maximum of 50% of Mr. Frank Deo's time and any other Sarnoff employee as requested by ACTV during the Period of Performance. Mr. Deo's or any other of Sarnoff personnel supporting this program Travel and Subsistence expenses that may be incurred as required by ACTV shall be paid for and processed directly by ACTV within one week of submission. Charges will be invoiced monthly for the work performed during the month. Payment terms are Net 30 Days. Terms and Conditions 1. Sarnoff shall not be liable or deemed to be in default for any delay or failure in performance for any reason beyond Sarnoff's reasonable control. 2. Sarnoff does not warrant or represent that ACTV's use of samples, data and/or information furnished hereunder will be free from infringement of any patent, copyright or mask work registration of any third Party(s) or as an obligation to defend any actions brought by any third Party(s) alleging infringement of, or claims for damages with respect to, any patent, copyright or mask work registration. 3. Sarnoff assumes no liability except as expressly provided in these terms and conditions. In no event shall Sarnoff be liable, whether in contract, tort, or negligence, for special, indirect, incidental or consequential damages. In no event shall Sarnoff's total liability to ACTV hereunder exceed the sum paid to Sarnoff by ACTV under this Agreement. 4. Sarnoff and ACTV agree that they will not use the other's name, either expressed or implied, without the other's prior written consent. 5. This Agreement shall not create any association, partnership or joint venture between the parties hereto, it being understood and agreed that the Parties are independent contractors and neither shall have any authority to bind the other in any way. This Agreement shall be binding upon the Parties, their heirs and assigns and may not be assigned without the prior written consent of the other Party. 6. This Agreement may be terminated by mutual agreement of the parties or by the default of a Party for failure to conform to any provision of this Agreement and failure to cure within thirty (30) days of notice of such default. ACTV may terminate this Agreement at any time upon written notice to Sarnoff. Sarnoff will use its best efforts to terminate the tasks being performed within thirty (30) days from receipt of notice and will be paid at Sarnoff's standard commercial rates. ACTV will also pay to Sarnoff the lesser of the cost to Sarnoff of all parts, supplies and equipment specific to the performance of the particular tasks ordered prior to ACTV's default or notice of termination, or the cost to Sarnoff for the cancellation of such orders. Sarnoff will use its best efforts to minimize the cost to ACTV. 7. This Agreement constitute the entire contract between the Parties with respect to the Project and supersedes all previous negotiations, comments and writing by the Parties and shall be changed only by a writing signed by the Parties. 8. Airline tickets and travel advance funds will be supplied to the Sarnoff employees directly by ACTV. Expense reports will be submitted to ACTV. DAVID SARNOFF RESEARCH CENTER, INC. ACTV'tm', Inc. By: VINCENT J. BOCCANFUSO, JR. By: WILLIAM C. SAMUELS ................................................. ................................................. Date 5/18/95 Date 5/18/95 Vincent J. Boccanfuso, Jr. Name William C. Samuels Director, Contracts Title: President
EX-10 11 EXHIBIT XCVIII David Sarnoff Research Center / Subsidiary of SRI International / CN 5300 / Princeton NJ 08543-5300 William Samuels Chairman and Chief Executive Officer ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 Re: Letter of Intent Dear Mr. Samuels: August 18, 1995 David Sarnoff Research Center, Inc. ('Sarnoff') is pleased to confirm our recent discussions with respect to proposed cooperative business efforts between us. This letter of intent shall be effective as of the date last signed below. By way of background, ACTV, Inc. ('ACTV') has developed several commercial technology products including individualized and/or interactive television programming technology consisting of multiple video and/or audio streams related in time and content which are selectively but transparently chosen by a user by interactively reacting to two-dimensional ('2D') and three-dimensional ('3D') video presentations and/or audio choices presented to the viewer. To achieve this, ACTV has developed ACTV coding language, ACTV programming language, ACTV programming methods, and ACTV 2D and 3D technology and long-distance learning technologies. Sarnoff has also developed various technologies including video server technology, 3D television applications, distance learning technology and other interactive television applications such as video insertion techniques. Each party represents that it has conducted and conducts design and development work in selected elements of personalized interactive television applications. The parties acknowledge that there will be different but overlapping areas of background technology, and intend to leverage to mutual advantage these common areas of experience and interest. The basis for our business relationship is the potential commercial success of Sarnoff's and ACTV's technologies used together. Sarnoff's experience and activities in emerging digital standards may be particularly helpful to any collaboration which may result between us. This letter is intended to encourage both companies to be as innovative as possible in expanding the use of and opportunities for ACTV and Sarnoff products. We envision a number of joint/collaborative projects that combine Sarnoff's strong capabilities in system and hardware design with ACTV's unique programming technology. Systems developed at Sarnoff might, upon mutual agreement, use or specify some of ACTV's commercial software or hardware components. Initial ideas for collaborative work include the joint development of distance learning technologies, 3D video, video server technologies, digital video television and broadcast applications. Accordingly, ACTV and Sarnoff intend to cooperate with each other on a non-exclusive basis to identify and make contracts for mutual business opportunities which include provisions to the effect that: New Intellectual Property -- Any new non-trivial intellectual property which is the subject of patents and patent applications including those on inventions, designs, methods, processes and software ('new patents'), developed jointly by ACTV employees with Sarnoff employees, or by Sarnoff employees in performance of any development contract funded by ACTV, will be jointly owned. The rights to use the new patents will be negotiated between the parties as they occur and may include both non-revenue arrangements and revenue sharing arrangements such as joint ventures, cross-licensing, royalty sharing and royalty free licensing agreements. Exclusivity in favor of ACTV in a field of use for individualized television applications will be considered for such jointly owned new patents that are substantially funded by ACTV, and royalty sharing arrangements may apply by agreement between us. In such circumstance, exclusivity to Sarnoff outside the agreed field will also be considered. With respect to the cooperative efforts between us, it is the current intent of ACTV to be in the production, content, and implementation areas of the business; similarly, it is the current intent of Sarnoff to be in the system and hardware design and implementation areas of the business as appropriate to support our various R&D customers and activities. Background Patents -- ACTV and Sarnoff each have certain pre-existing patents and patent applications filed prior to commencing any joint development programs between us and may develop additional background patents independently outside of such programs while they are in progress. Under protection of the Confidential Disclosure Agreement between us dated May 17, 1995, each party intends to make representative disclosures of its relevant background technology as business opportunities evolve. Each of us retains sole rights to its respective background patents and patent applications and any divisions, re-issues and continuations-in-part thereof, as well as to all patents and other intellectual property created independently of any joint programs between us. Any sale by either party of product which contains jointly owned patents, and which also makes use of the other party's background patents, may also invoke royalty obligations and payments for use of such background technology. Licenses or other access to such necessary background intellectual property will be negotiated and agreed in writing separately prior to any use of same. No rights in background patents of either party, admissions as to patentability, etc., are created, conveyed or implied by this letter of intent. Contract Sharing -- It is mutually recognized that both companies have specific, market-recognized technical strengths, ACTV in individualized interactive television program technology, and Sarnoff in video compression, consumer set-top box and interactive services technologies, collectively referred to herein as the technology area. The strategic partnership in the technology area is expected to enhance the reputation of both companies and increase their success in addressing opportunities in the technology area. It is desirable that both companies be able to cooperate to jointly obtain third party contracts and thereby to share significantly in the rewards from new opportunities in the technology area. -2- Sarnoff and ACTV agree to cooperate in responding to business opportunities in the technology area. This agreement to cooperate does not, however, restrict either company from responding individually or in forming other strategic relationships to respond to specific business opportunities in the technology area. The parties acknowledge, however, that the specific focus area of Sarnoff is intended to be in the system and hardware design and implementation areas of this business as appropriate to support our various R&D customers and activities, and the specific focus area of ACTV is intended to be the production, content, and implementation areas of business. Neither ACTV nor Sarnoff will use the name of the other in their brochures, advertising or other literature without advance written approval of the other party. The Confidential Disclosure Agreement between us dated May 17, 1995 is incorporated herein and will apply to proprietary information of a confidential nature exchanged between us. Nothing in this letter shall create any association, partnership or joint venture between the parties hereto, it being understood and agreed that the parties are independent contractors and neither shall have any authority to bind the other in any way. Each party shall be responsible for its own costs incurred hereunder. This letter is non-binding and shall expire one year from its effective date unless extended by written agreement of ACTV and Sarnoff. If you are in agreement with the intent of the parties as set forth above, please sign both duplicate originals of this letter and return one fully executed original for our use. Very truly yours, Accepted: David Sarnoff ACTV, Inc. Research Center, Inc. by: CURTIS R. CARLSON by: W.C. SAMUELS ............................. ..................... Curtis R. Carlson Title: Chairman-CEO Executive Vice President Date: August 18, 1995 August 18, 1995 -3- EX-23 12 EXHIBIT 23(I) INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES We consent to the use in this Registration Statement relating to 6,350,000 shares of Common Stock of ACTV, Inc. on From S-1 of our report dated March 15, 1995, relating to the consolidated financial statements of ACTV, Inc. and our report dated March 15, 1994 relating to the financial statements of ACTV Interactive, appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of ACTV, Inc. listed in Item 16. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such 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. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP New York, New York February 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----