-----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, VEkPwSFiIsBe0u9LW5mpUIT2HPAutGqcstV3Jfc+gGEQxZ7wUIHCKDrUznUHaZ+e AEDpb9P89Zfy7fg84ALV2w== 0000950146-97-001726.txt : 19971117 0000950146-97-001726.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950146-97-001726 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTV INC /DE/ CENTRAL INDEX KEY: 0000854152 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942907258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10377 FILM NUMBER: 97720661 BUSINESS ADDRESS: STREET 1: 1270 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2122622571 MAIL ADDRESS: STREET 1: 12270 AVE OF THE AMERICAS #2401 STREET 2: 12270 AVE OF THE AMERICAS #2401 CITY: NEW YORK STATE: NY ZIP: 10020 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ACTV, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-2907258 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 1270 Avenue of the Americas New York, New York 10020 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 262-2570 (Registrant's telephone number, including area code) - -------------- Securities registered pursuant to Section 12 (g) of the Act: Title of each class Name of exchange on which registered - ------------------- ------------------------------------ Common Stock, Par Value $0.10 Boston Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of November 13, 1997, there were 14,434,612 shares of the registrant's common stock outstanding. ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) December 31, September 30, 1996 1997 Current Assets: Cash and cash equivalents ............... $ 6,520,756 $ 2,014,980 Accounts receivable ..................... 410,193 588,497 Education equipment inventory ........... 337,504 346,672 Other ................................... 316,962 269,636 ------------ ------------ Total current assets ................ 7,585,415 3,219,785 ------------ ------------ Property and equipment-net .............. 724,089 1,996,615 ------------ ------------ Other Assets: Patents and patents pending-net ......... 253,779 235,525 Goodwill-net ............................ 3,067,560 2,747,781 Other ................................... 61,781 826,244 ------------ ------------ Total other assets .................. 3,383,120 3,809,550 ------------ ------------ Total .......................... $ 11,692,624 $ 9,025,950 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ... $ 1,594,655 $ 1,543,250 Deferred stock appreciation rights ...... 701,517 0 Preferred dividends payable ............. 195,384 470,653 ------------ ------------ Total current liabilities ........... 2,491,556 2,013,903 ------------ ------------ Total liabilities ................... 2,491,556 2,013,903 Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, none issued ............ -- -- Convertible preferred stock, no par value, 436,000 shares authorized: issued and outstanding 400,000 at December 31, 1996, 318,917 at September 30, 1997 ............. 9,115,664 7,079,032 Convertible preferred stock, .01 par value, 1,000,000 shares authorized: issued and outstanding 0 at December 31, 1996, 52,000 at September 30, 1997, liquidation value of $1,300,000 ............................. -- 520 Common stock, $.10 par value, 65,000,000 shares authorized: issued and outstanding 11,787,106 at December 31, 1996, 14,374,925 at September 30, 1997 ............. 1,178,711 1,437,493 Additional paid-in capital ................... 38,272,205 43,028,137 Notes receivable from stock sales ............ (200,000) (200,000) Accumulated deficit .......................... (39,165,512) (44,333,135) ------------ ------------ Total shareholders' equity ............. 9,201,068 7,012,047 ------------ ------------ Total ............................. $ 11,692,624 $ 9,025,950 ============ ============ See Notes to Consolidated Financial Statements 2 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Month Periods Three Month Periods Ended September 30, Ended September 30, 1996 1997 1996 1997 ---------- ---------- ---------- ---------- Revenues: Sales revenues .................... $1,093,127 $1,534,295 $329,612 $191,440 License fees from related party ... 12,689 -- 2,608 -- ---------- ---------- ---------- ---------- Total revenues ................. 1,105,816 1,534,295 332,220 191,440 Cost of Sales ..................... 480,321 434,287 165,711 78,847 ---------- ---------- ---------- ---------- Gross profit ................... 625,495 1,100,008 166,509 112,593 Expenses: Operating expenses ................ 1,407,558 957,516 401,570 246,076 Selling and administrative ........ 4,614,826 4,919,822 1,645,944 1,306,566 Depreciation and amortization ..... 362,563 150,210 37,327 51,722 Amortization of goodwill .......... 319,779 319,779 106,593 106,593 Stock appreciation rights ......... (162,516) (346,892) (217,099) (29,651) ---------- ---------- ---------- ---------- Total expense .................. 6,542,210 6,000,435 1,974,335 1,681,306 Interest (income) .................... (66,403) (103,239) (10,533) (11,156) ---------- ---------- ---------- ---------- Net loss ............................. 5,850,312 4,797,188 1,797,293 1,557,557 Preferred stock dividend ............. 28,493 370,435 28,493 121,041 ---------- ---------- ---------- ---------- Net loss applicable to common stock .. shareholders $5,878,805 $5,167,623 $1,825,786 $1,678,598 ========== ========== ========== ========== Loss per common share ................ $.50 $.42 $.15 $.13 Weighted average number of common shares outstanding ................... 11,723,874 12,338,339 11,799,797 13,171,584
See Notes to Consolidated Financial Statements 3 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Month Periods Three Month Periods Ended September 30, Ended September 30, 1996 1997 1996 1997 ----------- ----------- ----------- ----------- Cash flows from operating activities: Net loss .............................................. ($5,878,805) ($5,167,623) ($1,825,786) ($1,678,598) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization ......................... 682,341 469,989 143,919 158,315 Stock appreciation rights ............................. (162,516) (701,517) (217,099) (29,651) Common stock issued for preferred dividends ............................................. -- 95,167 -- 73,759 Common stock issued for services ...................... 114,047 165,000 -- 150,000 Changes in operating assets and liabilities: Accounts receivable ................................... (4,284) (178,304) 114,350 272,641 Other assets .......................................... (191,800) (185,189) 19,363 (38,286) Accounts payable and accrued expenses ................. 175,436 (51,405) 69,460 (11,212) Education equipment inventory ......................... (77,895) (9,168) 30,880 (34,403) Convertible preferred stock dividends payable ............................................... 28,493 275,269 28,493 47,284 ----------- ----------- ----------- ----------- Net cash (used) in operating activities ................................... (5,314,983) (5,287,781) (1,636,420) (1,090,151) ----------- ----------- ----------- ----------- Cash flows from investing activities: Investment in computer software production ............................................ -- (531,948) -- (132,488) Investment in property and equipment .................. (699,564) (1,404,482) (132,367) (1,181,215) ----------- ----------- ----------- ----------- Net cash used in investing activities ............................................ (699,564) (1,936,430) (132,367) (1,313,703) ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from sale of common stock .................... 1,903,485 1,428,000 -- 1,428,000 Net proceeds from sale of preferred stock ............. 3,600,601 1,290,435 3,600,601 1,300,000 ----------- ----------- ----------- ----------- Net cash provided by financing activities ................................................. 5,504,086 2,718,435 3,600,601 2,728,000 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ................................................ (510,461) (4,505,776) 1,831,814 324,146 Cash and cash equivalents, beginning of period ................................... 3,531,782 6,520,756 1,189,507 1,690,834 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period ......................................... 3,021,321 2,014,980 3,021,321 2,014,980 =========== =========== =========== ===========
4 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1997 1. The consolidated financial statements are unaudited, except as indicated. 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 Annual Report on Form 10-K for the year ended December 31, 1996. The Company's policy is to capitalize the cost of computer software production once technological feasibility is established upon completion of a detailed program design or upon completion of a working model. The Company's balance sheets at September 30, 1997 and December 31, 1996 reflect capitalized software production costs of $531,948 and $0, respectively, classified as a component of "Other" non-current assets. 3. During 1996, the Company raised approximately $9.1 million in net proceeds from a private placement of 5% convertible preferred stock (the "Convertible Preferred Stock") issued by a wholly-owned subsidiary. The Convertible Preferred Stock is convertible into Common Stock of ACTV, Inc. at varying discounts to the market price of the Common Stock. After September 1, 1997, holders of the Convertible Preferred Stock will be able to use the lesser of (i) the then current market price of the Company's Common Stock, or (ii) an average market price during the month of August 1997 as the price to which the discount is applied for conversions. The Company believes that it is highly likely that the holders of the Convertible Preferred Stock will elect to convert their stock into Common Stock of the Company and, accordingly, has included the Convertible Preferred Stock in its consolidated statement of shareholders' equity. 4. In September 1997 the Company raised approximately $1.3 million from a private placement of 7% exchangeable preferred stock (the "Exchangeable Preferred Stock") issued by ACTV Entertainment Inc. In November 1997, the holders of the Exchangeable Preferred Stock exchanged, one-for-one, the Exchangeable Preferred Stock for Series A 7% Convertible Preferred Stock issued by ACTV, Inc. ("Series A Preferred Stock"). The Series A Preferred Stock is convertible into the Company's Common Stock at $1.50 per share, and has a liquidation preference of $25 per share (face value) plus any accrued and unpaid dividends. 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. If the Company is not successful in obtaining such additional financing, management believes that the Company can fund its operations at least through the end of September 1998. To fund its operations at least through the end of September 1998, without additional financing, the Company will be required to reduce, or forego entirely, certain planned expenditures, including all expenditures related to the launch of its regional entertainment networks and to the entertainment area of its business in general. 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 end of September 1998. 5 5. The Company's balance sheets at September 30, 1997 and December 31, 1996 reflect credits to shareholders' equity of $27,500, and $55,000 respectively related to options issued but not yet vested at a price below the prevailing market price on the date of issuance. The options were issued to acquire a patent in September 1995. The Company's balance sheets at September 30, 1997 and December 31, 1996 also reflect a debit to shareholders' equity of $200,000 related to a non-recourse loan made by the Company to an employee in August 1995 to purchase the Company's common stock by exercising options. The due date of the non-recourse loan corresponds with the expiration date of the option exercised. 6. Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, effective for interim and annual periods ending after December 15, 1997, establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computing EOS currently found in Accounting Principles Board Opinion No. 15, Earnings Per Share. Common stock equivalents under APB No. 15, with the exception of contingently issuable shares (shares issuable for little or no cash consideration), are no longer included in the calculation of primary, or basic EPS. Under SFAS No. 128, contingently issuable shares are included in the calculation of primary EPS. The Company has determined that the adoption of this statement will have no material effect on the financial statements. 7. SFAS No. 129, Disclosure of Information about Capital Structure, effective for periods ending after December 15, 1997, establishes standards for disclosing information about an entity's capital structure, for all entities. The statement requires disclosure of the pertinent rights and privileges of various securities outstanding (stock, options, warrants, preferred stock, debt and participation rights) including dividend and liquidation preferences, participant rights, call prices and dates, conversion of exercise prices and redemption requirements. Adoption of this statement will have no effect of the Company as it currently discloses the information specified. 8. SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The Company has determined that the adoption of this statement will have no effect on the financial statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY To the extent that the information presented in this Form 10-Q discusses financial projections, information or expectations about the Company's products or markets, or otherwise makes statements about future events, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These include, among others, the successful and timely development and acceptance of new products and markets and the availability of sufficient funding to effect such product and/or market development. ACTV, Inc. (the "Company" or "ACTV") has developed proprietary technologies that individualize television programming ("Individualized Programming"). Individualized Programming, in the Company's opinion, significantly enhances the quality of television content by allowing the viewer to make instant and seamless changes within the live or pre-recorded television programming being viewed. Individualized Programming appears to be a standard TV program, but in fact is a multi-path telecast of several elements of programming material, such as instant replay, isolation cameras, statistical data, or alternative story lines. There is no limit to the number of viewers who can interact simultaneously with a program enhanced with the Company's Individualized Programming. Since its inception, the Company has incurred operating losses approximating $44.3 million related directly to the development and marketing of ACTV's Individualized Programming. The chief markets presently targeted by the Company for Individualized Programming are in-home entertainment and education (with an emphasis on distance learning and Internet applications). The Company seeks to exploit these markets, principally in the U.S., through licensing its Individualized Programming, by creating joint venture relationships, and by direct sales. Individualized Programming is designed to work with both single and multiple channels of 6 MHz band-width and with different modes of transmission: cable, direct broadcast satellite ("DBS"), wireless cable, broadcast systems and distance learning networks. The Company's initial emphasis in entertainment is to deploy its programming over the cable systems that have upgraded their signal origination facilities (referred to in the industry as "headends") for digital delivery. The Company's Individualized Programming can be received by cable viewers who have digital set-top terminals into which the Company's software application has been downloaded. The Company is emphasizing digital delivery over analog primarily because the channel capacity in digital transmission is greater. The Company is seeking to exploit the entertainment market, principally in the U.S., through the launch of regional entertainment networks. The Company's ability to develop differentiated, high-quality branded entertainment programming in a digital environment is initially based on its key strategic alliance with FOX Sports Net. FOX Sports Net consists of ten owned-and-operated regional sports networks, along with numerous affiliated systems across the country. Launched on November 1, 1996, the network is the United States sports telecasting arm of the worldwide sports alliance formed among News Corp., Liberty Media, and Tele- 7 Communications Inc. In the fall of 1997, the network expanded its reach to nearly 60 million subscribers with the launch of numerous SportsChannel regional networks under the FOX Sports Net banner. The Company has a national agreement with FOX Sports Net to license programming from each of its regional sports affiliates and to offer enhanced FOX Sports Net programming to any distributor that carries the corresponding regional FOX Sports Net channel. This agreement extends through June 2003. The FOX Sports Net national agreement followed the completion of the Company's eighteen-month Individualized Programming trial within the TCI of Ventura County cable system in greater Los Angeles. Sports programming for the trial was supplied to ACTV by FOX Sports West. Viewers participating in the trial received individualized FOX Sports West telecasts of Lakers and Clippers basketball, Kings and Ducks hockey, and California Angels baseball, among other offerings. The Company intends to launch its regional individualized sports networks in the late fourth quarter of 1997 or early in 1998, beginning with the region served by FOX Sports Southwest. FOX Sports Southwest distributes college and professional sports programs to 5.1 million households in Texas, Louisiana, Arkansas, Oklahoma and nine New Mexico counties. The Company has also announced plans to launch individualized networks in the regions served by FOX Sports West, FOX Sports Northwest, and the Sunshine Network, an affiliate in Florida. The Company will be responsible for the incremental content, transmission, delivery and master control costs incurred in connection with the Individualized Programming to be presented through its regional networks. Although the Company's intention is to launch the first of its regional networks within the next several months, there is no assurance that it will secure the funding necessary to effect such a launch or any future launches, or that other factors might not delay or prohibit the successful implementation of the plan. The Company's intention is for its regional networks to offer premium cable programming services that are advertiser-supported, with monthly subscription prices comparable to other U.S. premium channels. The projected regional network expansion 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 regional networks, even if launched, will generate significant revenues for the Company. In August 1997, NextLevel Systems, Inc. invested $1 million in Common Stock of the Company and agreed to market, jointly with ACTV, Individualized Programming applications. NextLevel (formerly part of General Instrument Corporation) is the leading supplier of digital television headend systems and digital set-top terminals. The Company and NextLevel had previously announced that ACTV's Individualized Programming would be incorporated into NextLevel's new MPEG-2 digital set-top cable and wireless terminals. The Company's objective in education is to create and deliver individualized instruction to the classroom through distance learning networks. ACTV's Individualized Programming enables students in remote classrooms to respond to questions during a televised lesson from the 8 program's instructor. After choosing a response, each student receives individualized audio feedback based on his or her input. The instructor is able to create and include individualized segments in a TV lesson by means of the Company's easy-to-use digital television authoring software. This Windows-based application permits the instructor to enter questions into a computer and then record, in his or her own voice, individualized audio responses. The responses tell students more than whether they are right or wrong -- they provide explanations and reinforcement. During a live lesson telecast, the instructor receives an instantaneous graphical summary of the student responses on a monitor in the studio. This two-way communication enables each student to receive the benefit of individual attention, while the teacher gets real-time, empirical data on the effectiveness of the televised lesson. In early 1997, the Company began the development of the first applications of its Java-based software suite, "eSchool," which permits an instructor to use the Internet as an accompanying instructional tool during a live video distance learning session. Java is a computer programming language developed for the Internet by Sun Microsystems. eSchool Online's software enables instructors to stream web content to their students' desktop computers in sync with distance learning video content that is presented simultaneously. eSchool Online's user software provides each student with a PC interface that displays three separate instructional elements together on-screen: a television lesson received directly by the PC (or played on a TV adjacent to the computer); Internet web sites, delivered to each student's computer at pre-determined times during the lesson to support the televised content; and an interactive eSchool "chat" application, which promotes student collaboration and student/teacher dialogue. eSchool software allows students and teachers in multiple locations to share a "virtual classroom." The Company operates directly and through wholly-owned subsidiaries. The principal subsidiaries are ACTV Entertainment, Inc., which is primarily responsible for the Company's activities in the entertainment market; The Texas Individualized Television Network, Inc., which will operate the Company's first individualized regional sports network; and ACTV Net, Inc. ("Net"), which is responsible for the Company's education business. Education accounts for all of the Company's current revenues. For purposes of discussing the combined statements of the Company and its subsidiaries, all intercompany items have been eliminated. RESULTS OF OPERATIONS Comparison of Nine Month Periods Ended September 30, 1997 and September 30, 1996 During the nine month period ended September 30, 1997, the Company's revenues increased 39% to $1,534,295 from $1,105,816 in the nine month period ended September 30, 1996. All revenues in the nine month period ended September 30, 1997 were derived from the education market, while in the 1996 nine-month period, the Company's revenues derived from education sales as well as from license and executive producer fees. The revenue increase in the 9 more recent period was the result of significantly higher sales of distance learning products and services, including the Company's first revenues from its new Internet software product. Cost of sales in the nine months ended September 30, 1997, decreased 10% to $434,287, compared with cost of sales of $480,321 in the nine months ended September 30, 1996. The Company's gross profit increased to 72% in the more recent period, from 57% in the corresponding 1996 period. The increase was due to a greater proportion of total revenues from higher margin products such as programs and software fees during the more recent period. In addition, the Company recorded no executive production fee revenues in the more recent period, unlike the 1996 period in which these lower margin services were a component of total revenues. Total expenses excluding cost of sales and interest expense in the nine months ended September 30, 1997, decreased 8% to $6,000,435, from $6,542,210 in the comparable period in 1996. The decrease was due to lower operating, amortization, and stock appreciation rights expenses, which more than offset moderately higher selling and administrative costs during the 1997 period. Depreciation and amortization expense for the nine months ended September 30, 1997, decreased 31% to $469,989, from $682,342 for the nine months ended September 30, 1996. This decrease was due to the recognition during the 1996 period of amortization expense for certain programming assets that were fully amortized during 1996. Interest income in the nine months ended September 30, 1997, increased 55% to $103,239, compared with $66,403 in the nine months ended September 30, 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either nine-month period. Net loss applicable to common shareholders for the nine months ended September 30, 1997, the Company's decreased 12% to $5,167,623, or $.42 per share, compared with the net loss of $5,878,805, or $.50 per share, incurred in the prior year's comparable period. The decrease was the result principally of greater total revenues and higher gross profit during the more recent nine-month period. Comparison of Nine Month Periods Ended September 30, 1996 and September 30, 1995 During the nine month period ended September 30, 1996, the Company's revenues increased 3% to $1,105,816, from $1,075,925 in the nine month period ended September 30, 1995. In the more recent period, the Company's revenues derived from education sales, as well as from license and executive producer fees related to its agreement with The Greenwich Group. All revenues in the nine month period ended September 30, 1995 were derived from the education market. Cost of sales in the nine months ended September 30, 1996, was $480,321, an increase of 51% over cost of sales of $318,655 in the nine months ended September 30, 1995. The Company's gross margin declined to 57% in the more recent period, from 70% in the corresponding 1995 period. The decline was due to the inclusion in the more recent period of executive production fees, which carry a lower profit margin than the Company's other revenue sources, and from proportionately lesser revenues from education programs, when compared to 10 the nine months ended September 30, 1995. Education programs have a higher gross margin than other education products sold by the Company. Total expenses excluding cost of sales and interest expense in the nine months ended September 30, 1996, increased 1%, to $6,542,210, from $6,498,151 in the comparable period in 1995. While operating expenses and selling and administrative expenses increased by approximately $1.6 million due to higher research and development expenses, and to higher expenses associated with the Company's interactive television network trial in California, stock appreciation rights expense decreased by approximately $1.4 million. This decrease was due principally to a lower market price for the Company's common stock at September 30, 1996. Depreciation and amortization expense for the nine months ended September 30, 1996, decreased 27% to $362,563, from $499,261 for the nine months ended September 30, 1995. This decrease was due primarily to the relatively higher depreciation expense related to set-top cable converters purchased for the California trial that was incurred the 1995 period. The Company incurred no interest expense for the nine months ended September 30, 1996, compared to interest expense of $93,596 in the prior year's comparable period. During 1995, the Company paid in full all of its short and long-term interest bearing obligations. Interest income in the nine months ended September 30, 1996, decreased 20% to $66,403, compared with $83,150 in the nine months ended September 30, 1995. The decrease was the result of lower available cash balances in the more recent period. For the nine months ended September 30, 1996, the Company's net loss increased 2%, to $5,878,805, or $.50 per share, compared to the net loss before extraordinary gain of $5,751,327, or $.59 per share incurred in the prior year's comparable period. The Company recorded an extraordinary gain of $94,117 in the nine months ended September 30, 1995, the result of the extinguishment of debt obligations for value that was less than the amounts recorded on the Company's books for such obligations. Net loss after extraordinary gain for the nine months ended September 30, 1995, was $5,657,210, or $.58 per share. Comparison of Three Month Periods Ended September 30, 1997 and September 30, 1996 During the three month period ended September 30, 1997 ("Third Quarter 1997"), the Company's revenues decreased approximately 42%, to $191,440, from $332,220 in the three month period ended September 30, 1996 ("Third Quarter 1996"). In the more recent quarter, all of the Company's revenues derived from education sales, while in Third Quarter 1996 the Company recorded revenues from both education sales and from license and executive producer fees. The decline in sales resulted from the repositioning and upgrade of the Company's education product line from standalone classroom programs to Internet and other distance learning software and programming. Management expects the Company's new state-of-the-art software for individualizing Internet and television distance learning applications to provide higher revenues, along with increased gross margins. Cost of sales in Third Quarter 1997 decreased 52% to $78,847, compared to Third Quarter 1996's cost of sales of $165,711. The Company's gross margin increased to 59% in the more recent quarter, from 50% in the corresponding 1996 quarter. The gross margin increase was due principally to a greater percentage of higher margin education software sales in the revenue mix for the more recent quarter. 11 Total expenses excluding cost of sales and interest expense decreased approximately 15% in Third Quarter 1997, to $1,681,306, from $1,974,335 in Third Quarter 1996. The decrease was due to lower operating and selling and administrative expenses, and a difference in stock appreciation rights expenses between the two periods. Depreciation and amortization expense in Third Quarter 1997 increased 10% to $158,315, from $143,920 in Third Quarter 1996. This increase was due to the retirement during the 1996 quarter of certain programming assets that were fully amortized. Interest income in Third Quarter 1997, increased 6% to $11,156, compared with $10,533 in Third Quarter 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either quarter. The Company's net loss applicable to common shareholders in Third Quarter 1997 decreased approximately 8%, to $1,678,598, or $.13 per share, from $1,825,786, or $.15 per share, in Third Quarter 1996, principally the result of the noted difference in operating, selling and administrative, and stock appreciation rights expense, which more than offset the increase, in the more recent period, of a higher dividend expense related to the Company's outstanding convertible preferred stock. Comparison of Three Month Periods Ended September 30, 1996 and September 30, 1995 During the three month period ended September 30, 1996 ("Third Quarter 1996"), the Company's revenues increased approximately 3%, to $332,220, from $322,036 in the three month period ended September 30, 1995 ("Third Quarter 1995"). In the more recent quarter, the Company's revenues derived from education sales, as well as from license and executive producer fees related to its agreement with The Greenwich Group. All revenues in Third Quarter 1995 were derived from the education market. Cost of sales in Third Quarter 1996 was $165,711, a 56% increase compared to Third Quarter 1995's cost of sales of $106,328. The Company's gross margin decreased to 50% in the more recent quarter, from 67% in the corresponding 1995 quarter. The gross margin decrease was due to a significantly lower percentage of education program sales in the revenue mix for the more recent quarter, as well as to the inclusion in Third Quarter 1996 of lower-margin production revenues. Education programs have a higher gross margin than other education products sold by the Company. Total expenses excluding cost of sales and interest expense decreased approximately 22% in Third Quarter 1996, to $1,974,335, from $2,530,908 in Third Quarter 1995. The decrease was due principally to a gain of approximately $200,000 related to stock appreciation rights in Third Quarter 1996, versus a corresponding expense of approximately $801,000 in Third Quarter 1995. This difference more than offset higher operating and selling and administrative expenses associated with the Company's operation of its California trial during the more recent quarter. Depreciation and amortization expense decreased in Third Quarter 1996 to $37,327, from $187,645 in Third Quarter 1995. The decrease resulted from the full depreciation prior to Third Quarter 1996 of set-top cable converters purchased for the California trial. 12 The Company incurred no interest expense in Third Quarter 1996, compared to interest expense of $20,001 in Third Quarter 1995. During 1995, the Company paid in full all of its short and long-term interest bearing obligations. Interest income in Third Quarter 1996 was $10,533, a decrease of 61% compared with $26,680 in Third Quarter 1995. The decrease resulted from lower available cash balances in the more recent period. The Company's net loss in Third Quarter 1996 decreased approximately 21%, to $1,825,786, or $.15 per share, from $2,308,521, or $.23 per share, in Third Quarter 1995, principally the result of lower stock appreciation rights expense, which more than offset greater operating, selling and administrative expenses related to the California trial. Liquidity and Capital Resources Since its inception, the Company (including its operating subsidiaries) has not generated revenues sufficient to fund its operations, and has incurred operating losses. Through September 30, 1997, the Company had an accumulated deficit of approximately $44.3 million. The Company's cash position on September 30, 1997 was $2,014,980, compared to $6,520,756 on December 31, 1996. During the nine month period ended September 30, 1997 the Company used $5,287,781 in cash for its operations, compared with $5,314,983 in the nine months ended September 30, 1996. With respect to investing activities, during the nine month period ended September 30, 1997 and 1996 the Company used cash of $1,936,430 and $699,564, respectively. Investing activities, in the more recent nine month period, were related to master control facility and other equipment purchased, leasehold improvements, and computer software production costs, while such activities in the 1996 quarter related to equipment purchases for the Los Angeles trial. The Company met its cash needs in the nine month period ended September 30, 1997 from the remaining proceeds from the private sale of convertible preferred stock effected in August 1996, and from the private sale of both common and convertible preferred stock in July and September 1997. The Company met its cash needs in the nine month period ended September 30, 1996 from the remaining proceeds from private sales of common stock effected in 1995, as well as from sales of common stock totaling $1.9 million that were concluded during the first quarter of 1996. During Third Quarter 1997 the Company used $1,090,151 in cash for its operations, compared with $1,636,420 in Third Quarter 1996. With respect to investing activities, in Third Quarter 1997 and 1996 the Company used cash of $1,313,703 and $132,367, respectively. Investing activities, in the more recent quarter, were related to master control facility and other equipment purchased, leasehold improvements, and computer software production costs, while such activities in the 1996 quarter related to equipment purchases for the Los Angeles trial. 13 The Company met its cash needs in Third Quarter 1997 from the remaining proceeds from the private sale of convertible preferred stock effected in August 1996, and from the private sale of both common and convertible preferred stock in July and September 1997. The Company met its cash needs in Third Quarter 1996 from the remaining proceeds from private sales of common stock effected in 1995, as well as from sales of common stock totaling $1.9 million that were concluded during the first quarter of 1996. In November 1997, the Company raised approximately $750,000 from the private sale of its Series A 7% Convertible Preferred Stock. The Company's balance sheets at September 30, 1997 and December 31, 1996 reflect expense accruals of $0 and $701,517, respectively, related to the Company's stock appreciation rights plan. The Company believes that it will be required to expend approximately $200,000 to $350,000 per quarter on an on-going basis for research and development, relating principally to software for both entertainment and education products and services. 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. If the Company is not successful in obtaining such additional financing, management believes that the Company can fund its operations at least through the end of September 1998. To fund its operations at least for this period, without additional financing, the Company will be required to reduce or forego entirely certain planned expenditures, including all expenditures related to the launch of its regional entertainment networks and to the entertainment area of its business in general. 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 end of September 1998. Statement of Financial Accounting Standards No. 128. Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, effective for interim and annual periods ending after December 15, 1997, establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computing EOS currently found in Accounting Principles Board Opinion No. 15, Earnings Per Share. Common stock equivalents under APB No. 15, with the exception of contingently issuable shares (shares issuable for little or no cash consideration), are no longer included in the calculation of primary, or basic EPS. Under SFAS No. 128, contingently issuable shares are included in the calculation of primary EPS. The Company has determined that the adoption of this statement will have no material effect on the financial statements. Statement of Financial Accounting Standards No. 129. SFAS No. 129, Disclosure of Information about Capital Structure, effective for periods ending after December 15, 1997, establishes standards for disclosing information about an entity's capital structure, for all entities. The statement requires disclosure of the pertinent rights and privileges of various securities outstanding (stock, options, warrants, preferred stock, debt and participation rights) including dividend and liquidation preferences, participant rights, call prices and dates, conversion of exercise prices and redemption requirements. Adoption of 14 this statement will have no effect of the Company as it currently discloses the information specified. Statement of Financial Accounting Standards No. 130. SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The Company has determined that the adoption of this statement will have no effect on the financial statements. Impact of Inflation Inflation has not had any significant effect on the Company's operating costs. 15 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS There are no pending material legal proceedings to which the Company is a party. ITEM 2 CHANGES IN SECURITIES None. ITEM 3 DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None. ITEM 5 OTHER INFORMATION None. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16 (a) Exhibits 11 Computation of Loss per Share 27 Financial Data Schedule (b) Reports on Form 8-K: None. 17 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTV, Inc. Registrant Date: November 14, 1997 /s/ William C. Samuels ----------------- ---------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: November 14, 1997 /s/ Christopher C. Cline ----------------- ------------------------ Christopher C. Cline Senior Vice President (principal financial and accounting officer) 18 EXHIBIT 11 ACTV, INC. AND SUBSIDIARIES COMPUTATION OF LOSS PER SHARE
Nine Month Period Three Month Period Ended September 30, Ended September 30, 1996 1997 1996 1997 ---------- ---------- ---------- ---------- Weighted average shares outstanding ....................... 11,723,874 12,338,339 11,799,797 13,131,584 Common stock equivalents .................................. -- -- -- -- ---------- ---------- ---------- ---------- Total ............................................ 11,723,874 12,338,339 11,799,797 13,131,584 ========== ========== ========== =========== Net loss applicable to common shareholders ................ $5,878,805 $5,167,623 $1,825,786 $1,678,598 ========== ========== ========== =========== Loss per share applicable to common shareholders .............................................. $.50 $.42 $.15 $.13 ========== ========== ========== ===========
19 EX-27 2 ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 2,014,980 0 588,497 0 346,672 3,219,785 2,856,433 859,819 9,025,950 2,013,903 0 1,437,493 0 520 5,574,034 9,025,950 1,534,295 1,534,295 434,287 5,877,338 493,532 0 0 (5,167,623) 0 (5,167,623) 0 0 0 (5,167,623) (0.42) (0.42)
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