-----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, LQup56PQj0CcNrjeKw5FGYsaY2DeooxFj1O1apbR8HA7/fQAZfkiaM04HkucHWq0 Z/9lNjYDy8Ixr6vPH0dFbA== 0000950146-98-000665.txt : 19980421 0000950146-98-000665.hdr.sgml : 19980421 ACCESSION NUMBER: 0000950146-98-000665 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980420 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-K/A SEC ACT: SEC FILE NUMBER: 001-10377 FILM NUMBER: 98596902 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-K/A 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ACTV, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-2907258 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 (b) 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of April 15, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant (based on The Nasdaq Stock Market closing price on April 15, 1998) was $18,868,268. As of April 15, 1998, there were 16,980,581 shares of the registrant's common stock outstanding. 1 The Company's Annual Report on Form 10-K filed March 31, 1998, is being amended to reflect changes to Part II: Item 6. - Selected Financial Data and Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations; and to Part IV, Item 14. (a)1. - Financial Statements. PART II Item 6. SELECTED FINANCIAL DATA
Years Ended December 31, ------------------------------------------------------------ 1993 1994 1995 1996 1997 --------- --------- --------- --------- ---------- Statement of Operations: Revenues(1) $ 164,602 $ 938,416 $ 1,311,860 $ 1,476,329 $ 1,650,955 Operating Expenses(1) 3,443,513 5,734,132 8,272,884 10,240,158 9,120,267 Equity in Net Loss of ACTV Interactive(2) 506,303 143,500 -- -- -- Loss Before Extraordinary Item(3) 4,156,955 5,122,010 6,920,906 8,605,097 7,352,441 Net Loss(3) 4,156,955 4,465,240 6,826,789 8,605,097 7,352,441 Loss Applicable to Common Stock Shareholders(5) 4,156,955 4,465,240 6,826,789 10,300,481 10,358,683 Weighted Average Shares Outstanding 5,800,134 7,897,278 10,162,128 11,739,768 12,883,848 Loss Per Common Share Before Extraordinary Item(3)(5) .72 .65 .68 .88 .80 Loss Per Common Share(3)(5) .72 .57 .67 .88 .80 Balance Sheet Data: 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 --------- --------- --------- --------- ---------- Working Capital 2,263,225 1,503,703 2,397,027 5,093,859 (1,082,097) Total Assets 5,920,720 7,733,314 8,551,128 11,692,624 7,901,918 Long Term Obligations 2,220,794 2,325,061 -- -- -- Stockholders' Equity(4) 1,910,603 3,972,543 6,893,853 9,201,068 5,416,290 Total Capitalization 4,131,397 6,297,604 6,893,853 9,201,068 5,416,290
(1) For the period between January 1, 1993, 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 Washington Post Company's 51% interest in ACTV Interactive. (2) The results of ACTV Interactive are accounted for under the equity method of accounting for 1993 and for the period January 1, 1994 to March 11, 1994. (3) Includes for the year ended 12/31/94 an extraordinary gain of $656,770, ($.08 per share) related to the extinguishment of debt and equipment lease obligations. Includes for the year ended 12/31/95 an extraordinary gain of $94,117 ($.01 per share) related to the extinguishment of debt obligations. (4) No cash or non-cash dividends on Common Stock have been paid or granted and the Company does not anticipate the declaration or payment of dividends on Common Stock in the foreseeable future. (5) Restated for years ended December 31, 1996 and 1997; see Note 16 to consolidated financial statements. 2 Item 7. 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-K 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") has developed proprietary technologies for individualized television programming ("Individualized Programming") and for Internet learning systems ("eSchool"). The Company's products, in general, are tools for the creation of programming that allows viewer participation for both television and Internet platforms. The chief market presently targeted by the Company for its Individualized Programming is in-home entertainment, particularly sports programming, while for the Internet the market focus is education, with an emphasis on schools and universities in the United States. For entertainment applications, the Company's Individualized Programming gives the viewer the ability to make instant and seamless changes within the live or pre-recorded television programming being viewed. Individualized Programming is a multi-path broadcast of several elements of programming material, such as instant replay, isolation cameras, statistical data, or additional features. There is no limit to the number of viewers who can interact simultaneously with a program enhanced with the Company's Individualized Programming ("ACTV Program" or "ACTV Programming"). For education applications, the Company has developed eSchool Online(TM) ("eSchool"), a Java-based software suite that permits a teacher to use the Internet as an accompanying instructional tool during a lesson. (Java is a programming language developed for the Internet by Sun Microsystems.) eSchool integrates Web content and a chat application with educational video effectively to create a "virtual" classroom. In addition, the Company markets analog and digital systems for televised distance learning applications that permit point-to-multi-point telecasts that can deliver pre-recorded individualized lessons as well as integrate individualized lessons into live distance learning class sessions. Since its inception, the Company has incurred operating losses approximating $47 million related directly to the development and marketing of the Individualized Programming and eSchool. The Company is seeking to exploit the entertainment market, principally in the U.S., through the launch of regionally based entertainment networks ("Regional Networks") Programming for the Regional Networks is provided through the Company's strategic alliance with FOX Sports Net. The Company has the rights to license FOX Sports Net programming from each of FOX Sports Net's regional sports affiliates and to offer enhanced FOX Sports Net programming to any distributor that carries the corresponding regional FOX Sports Net channel. The FOX Sports Net agreement extends through June 2003. 3 FOX Sports Net is a service of "National Sports Partners," a joint venture between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks, which is a 50/50 partnership between News Corp. and Tele-Communications Inc.'s Liberty Media Corporation. Equally owned by FOX/Liberty Networks and Cablevision's Rainbow Media Holdings, Inc., the new venture now reaches more than 58 million homes nationwide. The Company's business plan is to develop Regional Networks in regions served by Fox Sports Net, with distribution to be provided by cable operators that are currently upgrading their service from analog to digital transmission. Initially, the Regional Networks will feature sports programming, with the possible introduction of other types of programming in the future. The Company believes that the differentiation afforded by the Company's Individualized Programming will allow distributors to offer their customers Individualized Programming on a subscription basis. The Company plans to launch its first Regional Network in 1998 in the regions served by FOX Sports Southwest (the "Southwest Regional Network"). FOX Sports Southwest distributes programming to 5.1 million households in Texas, Louisiana, Arkansas, Oklahoma and nine New Mexico counties. The Southwest Regional Network will feature individualized telecasts of professional basketball (Houston Rockets, Dallas Mavericks, San Antonio Spurs), hockey (Dallas Stars), and baseball (Texas Rangers, Houston Astros), along with college sports events from the Southeastern, Southland and Western Athletic conferences. The Company has entered into an agreement with Tele-Communications Inc. ("TCI") under which TCI will distribute and market the Southwest Regional Network to its digital subscribers in Texas. The agreement also contemplates potential nationwide distribution by TCI of the Company's regional sports networks. The Company also plans to launch additional individualized networks in regions served by FOX Sports Net. The planned Regional Networks will feature FOX Sports Net regional programming enhanced by the Company's Individualized Programming. The Company will be responsible for the incremental content, transmission, delivery and master control costs incurred in connection with the product enhancement of the Individualized Programming to be presented through its Regional Networks. In August 1997, General Instrument Corp. ("GI") invested $1 million in common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly with the Company, Individualized Programming applications. GI is the leading supplier of digital television headend systems and digital set-top terminals. The Company and GI had previously announced that the Company's Individualized Programming would be incorporated into GI's new MPEG-2 digital set-top cable and wireless terminals. It is the Company's belief that it has adequate funding to launch the Southwest Regional Network in 1998. However, there is no assurance that it will secure the funding necessary to effect additional launches in other regions, or that other factors might not delay or prohibit the successful implementation of the Company's Regional Network strategy. The projected Southwest Regional Network and additional network expansion are 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 Southwest Regional 4 Network or other Regional Networks, if launched, will generate significant revenues for the Company. The target market for the Company's education products includes schools, state and local agencies, universities and private business. eSchool consists of a suite of integrated software products, including content creation software, student and teacher user software, and database assessment software. In addition, the Company provides Internet content development assistance, hosting of eSchool programs on its computer servers, and consulting to schools and universities. To date, nearly all of the Company's revenues have been derived from sales to the education market of eSchool and individualized educational programs and products. There is no assurance that the Company will be able to successfully compete in this market, where many of its current and potential competitors are companies with significantly greater resources than those of the Company. RESULTS OF OPERATIONS Comparison of the Years Ended December 31, 1996 and December 31, 1997 During the year ended December 31, 1997 ("Fiscal 1997"), the Company's revenues increased 12%, to $1,650,955, from $1,476,329 for the year ended December 31, 1996 ("Fiscal 1996"). All revenues during Fiscal 1997 were derived from the education market, while in Fiscal 1996, the Company's revenues derived from education sales as well as from license and executive producer fees. The revenue increase in the more recent period was the result of the inclusion of sales from eSchool, which was introduced during Fiscal 1997, and higher sales of distance learning products and services when compared to Fiscal 1996. Cost of sales decreased 27% in Fiscal 1997, to $471,956 , from $647,488 in Fiscal 1996, and cost of sales as a percentage of sales revenue decreased to 29% in the more recent year, from 44% in 1996. The relatively lower cost of sales in Fiscal 1997 was due to a greater proportion of educational programming revenues and the inclusion of eSchool sales in 1997. Both eSchool and educational programming have higher gross margins than the Company's other sources of revenue. Total expenses excluding cost of sales and interest expense in Fiscal 1997 decreased 10%, to $8,648,310, from $9,592,670 in the comparable period in 1996. The decrease was partially attributable to lower operating expenses and depreciation and amortization expense in the more recent period, which more than offset an increase in selling and administrative expense. Also, the Company recorded a gain of $346,892 in Fiscal 1997, compared to an expense of $183,634 related to stock appreciation rights. The difference was the result of a lower market price for the Company's Common Stock at the end of Fiscal 1997, when compared to the end of Fiscal 1996. Finally, during Fiscal 1996 the Company incurred a valuation allowance of $274,325 related to an investment in an affiliated company and, as a component of Fiscal 1996 selling and administrative expense, reserved $82,746 against license fee and production service receivables from this affiliate. During Fiscal 1997, the Company incurred no valuation allowance. In Fiscal 1997, direct expenses related to the entertainment and education markets were approximately $2.7 million and $2.9 million, respectively. 5 Depreciation and amortization expense for Fiscal 1997 decreased 11%, to $754,053, from $846,351 for Fiscal 1996. This decrease was due primarily to the recognition during Fiscal 1996 of amortization expense for programming assets that were fully amortized during that year. The Company's had no interest expense for either Fiscal 1997 or Fiscal 1996. Interest income for Fiscal 1997 decreased 26%, to $116,870, compared with $158,732 in Fiscal 1996. The decrease resulted from lower available average cash balances in the more recent year. For the Fiscal 1997 and 1996, the Company recorded $3,006,242 and $1,695,384, respectively, for dividends or accretions on convertible preferred stock issuances. All dividend payments were made in the Company's Common Stock. The increase during Fiscal 1997 is the result of the Company's having preferred stock outstanding for less than half of the year during Fiscal 1996. For Fiscal 1997, the Company's loss applicable to common shareholders was $10,358,683, or $.80 per share, an increase of less than 1% over the loss of $10,300,481 or $.88 per share, incurred in Fiscal 1996. The increase in net loss was due principally to higher dividends and accretion, in Fiscal 1997, which more than offset the positive effects of higher gross margins, lower operating expenses, lower depreciation, amortization, and stock appreciation rights expenses during the more recent year. Comparison of the Years Ended December 31, 1995 and December 31, 1996 During the year ended December 31, 1996 ("Fiscal 1996"), the Company's revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly higher education revenues from distance learning and the recognition of production revenues in the more recent period (compared to no production revenues in 1995), which more than offset a small decline in non-distance learning education sales. Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44% in the more recent year, from 25% in 1995. The relatively higher cost of sales in Fiscal 1996 was due to a greater proportion of total revenues generated from lower margin equipment products and production services, as compared to Fiscal 1995's sales mix. Total expenses excluding cost of sales and interest expense in Fiscal 1996 increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995. The increase was attributable to higher operating expenses (principally resulting from the Company's regional individualized network trial in Southern California), greater research and development expenditures, higher selling and administrative expenses, and a valuation allowance of $274,325 for the full amount of the Company's investment in The Greenwich Group. As a component of Fiscal 1996 selling and administrative expenses the Company also reserved $82,746 against license fee and production service receivables from The Greenwich Group. The Greenwich Group has experienced difficulty in raising sufficient capital to fund its operations and growth and has been unable to pay the Company for its services and license. In Fiscal 1996, direct expenses related to the entertainment and education markets were approximately $2.5 million and $2.6 million, respectively. 6 Depreciation and amortization expense for Fiscal 1996, decreased 24%, to $846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to the relatively higher depreciation expense incurred in Fiscal 1995 that related to set-top converters purchased for the California trial. The Company's interest expense for Fiscal 1996, decreased to zero, compared to $98,392 in the prior year. The decrease was due to the repayment of in full of the Company's debt obligations during 1995. Interest income for Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995. The increase resulted from higher available average cash balances in the more recent year. For the year ended December 31, 1996, the Company recorded $1,695,384 for dividends or accretions to holders of convertible preferred stock issued in August 1996 by one of its wholly-owned subsidiaries. For Fiscal 1996, the Company's loss applicable to common shareholders was $10,300,481 or $.88 per share, an increase of 51% over the loss of $6,826,789 or $.67 per share, incurred in Fiscal 1995. Included in the Fiscal 1995 net loss is an extraordinary gain of $94,117, or $.01 per share as 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. The increase in loss applicable to common shareholders was due to higher dividends and accretions, increased operating, selling and administrative expenses and lower operating margins during the more recent year, as noted above. 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 December 31, 1997, the Company had an accumulated deficit of approximately $51 million. The Company's cash position on December 31, 1997, was $554,077, compared to $6,520,756 on December 31, 1996. During the year ended December 31, 1997, the Company used $6,603,499 in cash for its operations, compared with $7,560,486 for the year ended December 31, 1996. The decrease in the more recent year was due to lower operating expenses and higher gross margins, which more than offset higher selling and administrative expenses. The Company met its cash needs in the year ended December 31, 1997 from a series of private placements of Common Stock (approximately $1.5 million in net proceeds, including the $1 million placement with GI) and Series A Convertible Preferred Stock (approximately $2.0 million in net proceeds). The Company met its cash needs in the year ended December 31, 1996 from the proceeds of a private placement of Common Stock ($1.9 million in net proceeds) and of convertible preferred stock issued by its wholly-owned subsidiary and convertible into shares of the Company ($9.1 million in net proceeds). With respect to investing activities in the year ended December 31, 1997, the Company used cash of $2,895,803, related principally to the purchase of equipment for a television master control facility in Dallas, Texas and for the systems development related to the incorporation of Individualized Programming into the GI cable set-top terminal and to eSchool. During the year ended December 31, 1996, the Company used cash of $444,189 related to the purchase of television production equipment and office improvements. All of the Company's operating subsidiaries have been dependent on advances from the Company to meet their obligations. The Company's subsidiary, The Texas Individualized Television 7 Network, Inc., raised funds directly for its operations in January 1998 and expects to fund its operations for the foreseeable future from the proceeds of this financing (see description below). During the year ended December 31, 1997, the Company advanced approximately $2.6 million to ACTV Net, $3 million to The Texas Individualized Television Network, Inc., and $2 million to ACTV Entertainment, Inc. and its other subsidiaries. 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. As compared to the Company's balance sheet as of December 31, 1996, the Company's balance sheet as of December 31, 1997, reflects an increase of $408,085 in preferred dividends payable, resulting from the issuance of additional convertible preferred stock during 1997 and the payment of dividends in kind rather than in cash. In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the "Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers purchased $5.0 million aggregate principal amount notes from the Issuer and Texas Network. The notes bear interest at a rate of 13.0% per annum, payable semi-annually, with principal repayment in one installment on June 30, 2003. During the term of the note, the Issuer may, at its option, pay any four semi-annual interest payments in kind rather than in cash, with an increase in the rate applicable to such payments in kind to 13.75% per annum. The Note is secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc. In connection with the purchase of such note, the Purchasers received on January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that grants the Purchasers the right to purchase up to 17.5% of the fully-diluted shares of common stock of Texas Network. The Warrant expires on June 30, 2003. The Warrant also grants the Purchasers the right, through July 14, 1999, to exchange the Warrant for such number of shares of the Company's Common Stock, at the time of and giving effect to such exchange, equal to 5.5% of the fully diluted number of shares of Common Stock outstanding, after giving effect to the exercise or conversion of all then outstanding options, warrants and other rights to purchase or acquire shares of Common Stock. After five years from the date of issuance, the Purchasers have the right to put the warrants to the Texas Network for a value based on a multiple of its operating income. Prior to June 30, 1998, should the Company form and capitalize an entity with the intent to commence operations for a second Regional Network in one of the ten FOX Sports Net owned and operated regions, the Purchasers have a one time option to purchase notes from such entity on the same terms and conditions as the Texas Network financing. During the first three months of 1998, the Company has raised a total of $1.4 million from a series of private placements of its Common Stock. In January 1998, the Company entered into an agreement with certain holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement provides that the Company, at its sole discretion, may purchase from certain holders of the Preferred Shares up to an aggregate of 150,000 Preferred 8 Shares based on a predetermined schedule through June 30, 1998. If the Company chooses to purchase the Preferred Shares, the Company may, at its sole discretion, pay in cash or a combination of cash, the Company's Common Stock, and warrants to purchase the Common Stock. Management of the Company believes that its current funds (taking into account the approximately $6.4 million raised during the first three months of 1998) will enable the Company to finance its entertainment and corporate operations at their present level for at least the next twelve months. Such belief is based on assumptions that could prove to be incorrect, in which case the Company may require additional capital to finance such operations during this period. In addition, if the Company is not successful at raising additional funds, it may be required to significantly reduce its education operations. While the Company believes that it has adequate funds to launch and operate its planned Southwest Regional Network, it will need additional funding for Regional Network expansion. While the Company has engaged an investment bank for assistance in securing such financing, the Company has no commitments from lenders or investors at this time and there is no assurance that it will be able to raise the necessary capital to effect additional Regional Network launches or to maintain its education operations at current levels. Such belief is based on assumptions that could prove to be incorrect, in which case the Company may require additional financing during this period. The Company does not have any material contractual commitments for capital expenditures, although the Company believes that the Southwest Regional Network may need to acquire approximately $750,000 in equipment for a second master control facility. Impact of Inflation Inflation has not had any significant effect on the Company's operating costs. New Accounting Pronouncements 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. Statement of Financial Accounting Standards No. 131. The Company is required to adopt SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during the year ending December 31, 1998. The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends FASB Statement No. 9 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. The Company has not yet determined what effect the adoption of this statement will have on the financial statements. 10 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are listed under Item 14 in this report. PART IV Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K: (a)1. FINANCIAL STATEMENTS: See the Consolidated Financial Statements beginning on Page F-1 hereafter, which is incorporated by reference. (a)2. FINANCIAL STATEMENT SCHEDULE The following Financial Statement Schedule for the years ended December 31, 1997 and December 31, 1996 is filed as part of this Annual Report. The Company had no activity reportable on this schedule for the year ended December 31, 1995. Schedule II - Valuation and Qualifying Accounts and Reserves
Column B Column C Column D Column E ---------- ---------------------- ---------- ---------- Balance at Charged to Charged to Balance at Beginning Costs and Other Deductions End Description of Period Expenses Accounts -Describe of Period - -------------------------------------------------------------------------------- Year ended 12/31/96: Accounts receivable allowance for doubtful accounts .............. $ 82,746 $ 82,746 Reserve for investment losses ................ $274,325 $274,325 Year ended 12/31/97: Accounts receivable allowance for doubtful accounts .............. $ 82,746 $ 43,188 $ 82,746 $ 43,188 Reserve for investment losses ................ $274,325 $274,325 --
During 1997, the balances of $82,746 for accounts receivable allowance and $274,325 for investment loss reserve were written off as uncorrectable and unrecoverable, respectively. 11 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of ACTV, Inc.: We have audited the accompanying consolidated balance sheets of ACTV, Inc. and subsidiaries ("the Company") as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 16, the accompanying 1996 and 1997 consolidated financial statements have been restated. Deloitte & Touche LLP New York, New York March 18, 1998, (April 17, 1998 as to Note 16) F-1 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
December 31, December 31, 1996 1997 (as restated (as restated see Note 16) see Note 16) ------------ ------------ Current Assets: Cash and cash equivalents ..................... $ 6,520,756 $ 554,077 Accounts receivable-net ....................... 410,193 303,044 Education equipment inventory ................. 337,504 237,757 Other ......................................... 316,962 308,653 ------------ ------------ Total current assets ....................... 7,585,415 1,403,531 ------------ ------------ Property and equipment-net ....................... 724,089 2,596,785 ------------ ------------ Other Assets: Patents and patents pending ................... 253,779 279,356 Software development costs .................... -- 669,852 Goodwill ...................................... 3,067,560 2,641,188 Other ......................................... 61,781 311,206 ------------ ------------ Total other assets ......................... 3,383,120 3,901,602 ------------ ------------ Total ................................... $ 11,692,624 $ 7,901,918 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ......... $ 1,594,655 $ 1,882,159 Deferred stock appreciation rights ............ 701,517 -- Preferred dividends payable ................... 195,384 603,469 ------------ ------------ Total current liabilities .................. 2,491,556 2,485,628 Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, issued and out- standing none at December 31, 1996, 86,200 at December 31, 1997 ................ -- 8,620 Preferred stock of a subsidiary holding solely parent company obligations and convertible into common shares of the parent, no par value, 436,000 shares authorized: issued and outstanding 400,000 at December 31, 1996, 316,944 at December 31, 1997 ........ 6,615,664 7,029,708 Common stock, $.10 par value, 35,000,000 shares authorized: issued and outstand- ing 11,787,106 at December 31, 1996, 14,614,611 at December 31, 1997 ............ 1,178,711 1,461,461 Additional paid-in capital .................... 42,272,205 48,140,596 Notes receivable from stock sales ............. (200,000) (199,900) Accumulated deficit ........................... (40,665,512) (51,024,195) ------------ ------------ Total shareholders' equity ................. 9,201,068 5,416,290 ------------ ------------ Total ................................... $ 11,692,624 $ 7,901,918 ============ ============
See Notes to Consolidated Financial Statements F-2 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1995 1996 1997 (as restated (as restated see Note 16) see Note 16) ---------- ----------- ----------- Revenues: Revenues ............................ $1,311,130 $1,459,540 $1,650,955 License fees from related party ..... 730 16,789 -- ---------- ----------- ----------- Total revenues .................... 1,311,860 1,476,329 $1,650,955 Cost of Sales ....................... 334,136 647,488 471,956 ---------- ----------- ----------- Gross profit ...................... 977,724 828,841 1,178,999 Expenses: Operating expenses .................. 1,260,134 1,955,601 1,360,838 Selling and administrative .......... 4,998,020 6,332,759 6,880,311 Depreciation and amortization ....... 686,906 419,979 327,681 Amortization of goodwill ............ 426,372 426,372 426,372 Loss on investment .................. -- 274,325 -- Stock appreciation rights ........... 567,316 183,634 (346,892) ---------- ----------- ----------- Total expenses .................... 7,938,748 9,592,670 8,648,310 Interest (income) ..................... (138,510) (158,732) (116,870) Interest expense--related parties ..... 98,392 -- -- ---------- ----------- ----------- Interest expense (income) - net ..... (40,118) (158,732) (116,870) ---------- ----------- ----------- Net loss before extraordinary gain .................................. 6,920,906 8,605,097 7,352,441 Gain on extinguishment of debt ........ 94,117 -- -- ---------- ----------- ----------- Net loss .............................. 6,826,789 8,605,097 7,352,441 Preferred stock dividends and accretions............................. -- 1,695,384 3,006,242 Loss applicable to common stock shareholders .......................... $6,826,789 $10,300,481 $10,358,683 ========== =========== =========== Basic loss per common share before extraordinary gain .................... $.68 $.88 $.80 Basic loss per common share after extraordinary gain .................... $.67 $.88 $.80 Weighted average number of common shares outstanding .................... 10,162,128 11,739,768 12,883,848
See Notes to Consolidated Financial Statements F-3 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Preferred Stock Additional -------------------------- ----------------------- Paid-In ------------ Shares Amount Shares Amount Capital Deficit ----------- ----------- ---------- ---------- ------------ ------------ Balances January 1, 1995 9,019,550 $ 901,955 $ 26,608,830 $(23,538,242) Issuance of shares in connection with financings 1,990,293 199,029 -- -- 8,730,627 -- Issuance of shares in connection with exercise of stock options 308,247 30,825 -- -- 1,129,924 -- Issuance of shares for services 78,329 7,833 -- -- 217,361 -- Net loss -- -- -- -- -- (6,826,789) ----------- ----------- ------- ---------- ------------ ------------ Balances December 31, 1995 11,396,419 $ 1,139,642 $ 42,686,742 $(30,365,031) =========== =========== ======= ========== ============ ============ Issuance of shares in connection with financings 450,000 45,000 400,000 5,115,664 5,832,985 Accretion of subsidiary preferred stock beneficial feature 1,500,000 Issuance of shares for services 45,687 4,569 109,478 Reversal of option exercise (105,000) (10,500) (357,000) Net loss (8,605,097) Preferred stock dividend and accretion (1,695,384) ----------- ----------- ------- ---------- ------------ ------------ Balances December 31, 1996 (as restated, see Note 16) 11,787,106 $ 1,178,711 400,000 $6,615,664 $ 42,272,205 $(40,665,512) =========== =========== ======= ========== ============ ============ Issuance of shares in connection with financings 733,333 73,333 86,200 8,620 3,447,778 Accretion of subsidiary preferred stock beneficial feature 2,500,000 Issuance of shares for services 286,511 28,651 414,473 Issuance of shares in connection with exchange of preferred stock 1,795,661 179,566 (83,056) (2,085,956) 1,994,980 Issuance of shares in connection with exercise of stock options 12,000 1,200 11,160 Net loss (7,352,441) Preferred stock dividend and accretion (3,006,242) ----------- ----------- ------- ---------- ------------ ------------ December 31, 1997 (as restated, see Note 16) 14,614,611 1,461,461 403,144 7,038,328 48,140,596 $(51,024,195) =========== =========== ======= ========== ============ ============
See Notes to Consolidated Financial Statements. F-4 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1996 1997 ----------- ------------ ------------ Cash flows from operating activities: Net loss applicable to common shareholders ......... $(6,826,789) $(10,300,481) $(10,358,683) ----------- ------------ ------------ Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization ...................... 1,220,873 846,354 754,053 Stock appreciation rights .......................... (183,309) 134,634 (701,517) Gain on extinguishment of debt obligation .......... (94,717) -- -- Stock issued in lieu of cash compensation .......... 563,430 114,047 443,125 Common stock issued or reserved for preferred dividends and accretions ................. -- 1,500,000 2,598,156 Loss on investment ................................. -- 274,325 -- Bad debt reserve ................................... -- 82,746 43,188 Changes in assets and liabilities: Accounts receivable ................................ (150,938) (143,648) 63,960 Education equipment inventory ...................... 34,065 (225,286) 99,747 Other assets ....................................... 80,552 (542,824) (241,117) Accounts payable and accrued expenses .............. 165,023 504,263 287,504 Preferred stock dividends payable .................. 93,333 195,384 408,085 ----------- ------------ ------------ Net cash used in operating activities ..................................... (5,098,477) (7,560,486) (6,603,499) ----------- ------------ ------------ Cash flows from investing activities: Investment in patents pending ...................... -- -- (50,000) Investment in property and equipment ............... (575,323) (444,189) (2,159,576) Investment in systems .............................. -- -- (686,227) ----------- ------------ ------------ Net cash used in investing activities ................... (575,323) (444,189) (2,895,803) Cash flows from financing activities: Proceeds from exercise of warrants and options ........................................ 122,810 -- 12,360 Proceeds from preferred stock issuances ............ -- 9,115,664 2,045,163 Proceeds from equity financing ..................... 8,951,859 1,877,985 1,475,000 Discounted note prepayment ......................... (101,458) -- -- Note repayment ..................................... (2,247,469) -- 100 ----------- ------------ ------------ Net cash provided by financing activities ............... 6,725,742 10,993,649 3,532,623 ----------- ------------ ------------ Net (decrease) increase in cash and cash equivalents ................................... 1,051,942 2,988,974 (5,966,679) Cash and cash equivalents, beginning of period ................................ 2,479,840 3,531,782 6,520,756 ----------- ------------ ------------ Cash and cash equivalents, end of period ...................................... 3,531,782 6,520,756 554,077 =========== ============ ============
See Notes to Consolidated Financial Statements. Supplemental disclosure of cash flow information: See Note 15 F-5 ACTV, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - -------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization ACTV, Inc. was incorporated July 8, 1983. ACTV, Inc. and its subsidiaries (the "Company" or "ACTV"), has developed and markets proprietary technologies for individualized television programming (the "Individualized Programming") and for Internet learning systems. Individualized Programming permits a viewer to experience instantly responsive television. Since its inception, the Company has been engaged in the development of Individualized Programming, the production of programs that use its Individualized Programming and the marketing and sales of the various products and services incorporating the Company's Individualized Programming. In 1997, the Company introduced to the education market eSchool Online ("eSchool"), a suite of software products that permit a teacher to use the Internet as an accompanying instructional tool during a live or pre-recorded video lesson. Principles of Consolidation - The Company's consolidated financial statements include the balances of its wholly-owned operating subsidiaries. In consolidation, all intercompany account balances are eliminated. 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, 1995, 1996 and 1997 aggregated $70,790, $189,957 and $286,883, respectively. Education Equipment - Education equipment consists of standard personal computers adapted to provide individualized programming functionality, 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 first-in, first-out 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, 1996, and 1997, are net of accumulated amortization of $116,371 and $141,072, respectively. Software Development Costs - The Company capitalizes costs incurred for product software where economic and technological feasibility has been established. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the respective products (5 years). The balance at December 31, 1997, is net of accumulated amortization of $16,376. 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 Individualized Programming, were $616,455 for the year ended December 31, 1995, $1,221,362 for the year ended December 31, 1996, and $551,328 for the year ended December 31, 1997. Earnings/(Loss) Per Share - The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the period ended December 31, 1997, which establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computing EPS currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings Per Share"). Common stock equivalents under APB No. 15 are no longer included in the F-6 calculation of primary, or basic, EPS. Loss per common share equals net loss divided by the weighted average number of shares of the Company's common stock ("Common Stock") outstanding during the period. The Company did not consider the effect of stock options or convertible preferred stock upon the calculation of the loss per common share, as it would be anti-dilutive. Reclassifications - Certain reclassifications have been made in the December 31, 1995, and 1996, financial statements to conform to the December 31, 1997, presentation. Intangibles - The excess of the purchase cost over the fair value of net assets acquired in an acquisition (goodwill) 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 operation 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. Other Current Assets - The Company's consolidated balance sheets at December 31, 1996 and December 31, 1997 reflect balances of $343,962 and $224,712, respectively, related to cash advances made to executive officers. New Accounting Pronouncements - ----------------------------- 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. Statement of Financial Accounting Standards No. 131. The Company is required to adopt SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during the year ending December 31, 1998. The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. The Company has not yet determined what effect the adoption of this statement will have on the financial statements. 2. NATURE OF OPERATIONS The principal markets for the Company's products are in-home entertainment and education within the United States. The Company plans to sell individualized entertainment programming (initially professional and college sports programming) to the end user through cable television systems on a subscription basis. The Company sells eSchool and individualized distance learning programming and related hardware to schools, colleges, and private education networks. No single client accounted for more than 10% of the Company's revenues during the year ended December 31, 1997, except for Georgia Public Television, which accounted for approximately 17% and 24% of total revenues in 1996 and 1997, respectively and the Texas Workforce Commission, which accounted for 24% of total revenues in 1997. During 1996, the Company generated no revenues from the Texas Workforce Commission. 3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS F-7 The preparation of the Company's financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 4. PROPERTY AND EQUIPMENT - NET Property and equipment - net at December 31, 1996, and 1997, consisted of the following (at cost): 1996 1997 -------- --------- Machinery and equipment $636,845 2,931,682 Office furniture and fixtures 357,373 501,435 -------- --------- Total 994,218 3,433,117 Less accumulated depreciation 270,129 836,332 -------- --------- Total $724,089 2,596,785 ======== ========= 5. EXTRAORDINARY ITEM During 1995, the Company realized an extraordinary gain of $94,117 related to the repayment of an obligation to a former affiliate of the Company at an amount below the value of which such obligation was carried on the books of the Company. 6. FINANCING ACTIVITIES In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the "Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers purchased $5.0 million aggregate principal amount notes from the Issuer and Texas Network. The notes bear interest at a rate of 13.0% per annum, payable semi-annually, with principal repayment in one installment on June 30, 2003. During the term of the note, the Issuer may, at its option, pay any four semi-annual interest payments in kind rather than in cash, with an increase in the rate applicable to such payments in kind to 13.75% per annum. The Note is secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc. In connection with the purchase of such note, the Purchasers received on January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that grants the Purchasers the right to purchase up to 17.5% of the fully-diluted shares of common stock of Texas Network. The Warrant expires on June 30, 2003. The Warrant also grants the Purchasers the right, through July 14, 1999, to exchange the Warrant for such number of shares of the Company's Common Stock, at the time of and giving effect to such exchange, equal to 5.5% of the fully diluted number of shares of Common Stock outstanding, after giving effect to the exercise or conversion of all then outstanding options, warrants and other rights to purchase or acquire shares of Common Stock. After five years from the date of issuance, the Purchasers have the right to put the warrants to the Texas Network for a value based on a multiple of its operating income. Prior to June 30, 1998, should the Company form and capitalize an entity with the intent to commence operations for a second Regional Network in one of the ten FOX Sports Net owned and operated regions, the Purchasers have a one time option to purchase notes from such entity on the same terms and conditions as the Texas Network financing. During the first three months of 1998, the Company has raised a total of $1.4 million from a series of private placements of its Common Stock. F-8 During 1997, the Company raised approximately $3.5 million from the proceeds of a series of private placements of Common Stock (approximately $1.5 million in net proceeds) and Series A Convertible Preferred Stock (approximately $2.0 million in net proceeds). During 1996, the Company raised approximately $11.0 million net from the proceeds of a private placement of common stock ($1.9 million in net proceeds) and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued by its wholly-owned subsidiary and convertible into shares of the Company ($9.1 million in net proceeds). The Convertible Preferred Stock is convertible into Common Stock of ACTV, Inc., beginning January 1, 1997, at varying discounts to the market price of Common Stock. After September 1, 1997, holders of the Convertible Preferred Stock have been 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. In addition, the Company has the right to redeem the Convertible Preferred Stock at a price equal to $25 times the number of shares being purchased, plus accrued and unpaid dividends (the "Redemption Price"). This right may be exercised by the Company only if the closing price of the Company's Common Stock is above $9.00 for thirty consecutive trading days prior to redemption. 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. The Convertible Preferred Stock is convertible into shares of common stock at a discounted conversion price. The discount ranged from 14% to a maximum of 30.375%. The extent of the beneficial conversion feature was approximately $4.0 million, representing the maximum difference between the discounted conversion price and the prevailing market price of the Common Stock. Preferred stock accretions of $1.5 million and $2.5 million, respectively, were recorded for the years ended December 31, 1996 and 1997. Management of the Company believes that its current funds (taking into account the approximately $6.4 million raised during the first three months of 1998) will enable the Company to finance its entertainment and corporate operations at their present level for at least the next twelve months. Such belief is based on assumptions that could prove to be incorrect, in which case the Company may require additional capital to finance such operations during this period. In addition, if the Company is not successful at raising additional funds, it may be required to significantly reduce its education operations. While the Company believes that it has adequate funds to launch and operate its planned Southwest Regional Network, it will need additional funding for Regional Network expansion. While the Company has engaged an investment bank for assistance in securing such financing, the Company has no commitments from lenders or investors at this time and there is no assurance that it will be able to raise the necessary capital to effect additional Regional Network launches or to maintain its education operations at current levels. 7. SHAREHOLDERS' EQUITY At December 31, 1997, the Company had reserved shares of Common Stock for issuance as follows: 1989 Qualified Stock Option Plan 49,567 1989 Non-Qualified Stock Option Plan 47,250 1996 Qualified Stock Option Plan 380,000 Options granted outside of formal plans 3,062,401 --------- Total 3,539,218 ========= Convertible Preferred Stock At December 31, 1997, the Company was authorized to issue 1,000,000 shares of blank check Preferred Stock, par value $0.10 per share, of which 120,00 shares have been designated Series A Convertible Preferred Stock. At December 31, 1997, 86,200 shares of Series A Convertible Preferred Stock were issued and outstanding. Dividends, which are payable in cash or in kind, are payable semi-annually at a rate of 7% per annum. F-9 Exchangeable Preferred Stock At December 31, 1997, the Company's wholly-owned subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of Convertible Preferred Stock, no par value, of which 316,944 shares were issued and outstanding. Dividends, which are payable in cash or in kind, compound quarterly and are payable semi-annually at a rate of 5% per annum. 8. 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, 1997, 97,500 options had been granted under this plan, of which 19,000 had been exercised and 28,933 had expired or been canceled. 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, 1997, 97,000 options had been granted under this plan, of which 22,250 had been exercised and 27,500 had expired or been canceled. During 1996, the Board of Directors approved the Company's 1996 Stock Option Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants to employees and others who provide significant services to the Company. Under the 1996 Option Plan, the Company is authorized to issue options for a total of 500,000 shares of Common Stock. As of December 31, 1997, the Company had issued 430,000 options under the plan, of which none had been exercised and 50,000 had been canceled. At December 31, 1997, the Company also had outstanding options that were issued to Directors, certain employees and consultants for the purchase of 3,062,401 shares of Common Stock that were not issued pursuant to a formal plan. The prices of these options range from $1.50 to $5.50 per share; they have expiration dates in the years 1998 through 2003. 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 the status of the Company's stock options as of December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 Wgtd. Wgtd. Wgtd. Avg. Avg. Avg. 1997 Exer 1996 Exer 1995 Exer Shares Price Shares Price Shares Price --------- ----- --------- ----- --------- ----- Outstanding at beginning of period 3,328,718 2,747,082 Options granted 339,683 $1.91 887,500 $3.73 1,706,087 $3.41 Options exercised 17,000 $0.73 -- -- 141,833 $2.33 Options terminated 112,183 $4.06 305,864 $3.76 422,276 $5.27 Outstanding at end of period 3,539,218 $1.81 3,328,718 $2.99 2,747,082 $3.27 Options exercisable at end of period 2,363,134 $1.87 1,719,134 $3.19 1,091,083 $3.04
F-10 The following table summarizes information about stock options outstanding at December 31, 1997:
Weighted Number Average Weighted Weighted Outstanding Remaining Average Number Average Range of at Contractual Exercise Exercisable at Exercise Exercise Prices 12/31/97 Life Price 12/31/97 Price - ------------------------------------------------------------------------------------------------- 0 to 1.50 2,822,718 5.0 Years $1.50 1,757,053 $1.50 1.51 to 3.50 474,000 1.7 Years $2.52 446,915 $2.52 3.51 to 5.50 242,500 1.7 Years $4.05 159,166 $4.18
The weighted average fair value of options granted during 1996 and 1997 was $1.21 and $.64 per share, respectively, excluding the value of options granted and terminated within the year. In the case of each issuance, options were issued at an exercise price that was higher than the fair market value of the Company's Common Stock on the date of grant. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation cost has been recognized for option issuances. Had compensation cost for the Company's option issuances been determined based on the fair value at the grant dates consistent with the method of FASB Statement 123, the Company's net loss and loss per share for the years ended December 31, 1995, 1996 and 1997 would have been increased to the pro forma amounts indicated below:
Loss to common shareholders 1995 1996 1997 ---- ---- ---- As reported $6,826,789 $10,300,481 $10,358,683 Pro forma $9,506,556 $11,185,735 $10,574,807 Net loss per common share 1995 1996 1997 ---- ---- ---- As reported $0.67 $0.88 $0.80 Pro forma $0.94 $0.95 $0.82
The Company estimated the fair value of options issued during 1995, 1996 and 1997 on the date of each grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility for 1995 and 1996 of 61.5%, expected volatility for 1997 of 57.3%, and a risk free interest rate of 6% for all years. Certain employees, including the executive officers Samuels, Reese, Crowley and Cline, have been granted options to purchase Class B Common Stock, at fair value as of the date of grant, of certain of the Company's subsidiaries; such common stock, if issued, will have majority voting rights in such subsidiaries. 9. STOCK APPRECIATION RIGHTS PLANS The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was approved by the Company's stockholders in December 1992. Subject to adjustment as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation Rights ("SARs") that may be granted shall not exceed 900,000. The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was adopted by the Board of Directors in April 1996 and approved by the shareholders in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall not exceed 500,000; provided, however, that at no time shall there be more than an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on the number of recipients to whom awards may be made. F-11 Both the 1992 and 1996 SAR Plans are administered by the Stock Appreciation Rights Committee (the "SAR Committee"). SARs may not be exercised until the six months from the date of grant. SARs issued pursuant to the 1992 SAR Plan vest in five equal annual installments beginning twelve months from the date of grant. SARs issued pursuant to the 1996 SAR Plan vest either in a lump sum or in such installments, which need not be equal, as the Committee shall determine. 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 or pursuant to a domestic relations order as defined in the Internal Revenue Code of 1986, as amended. 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 1992 SAR Plan, as of December 31, 1997, the Company has granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to ten employees. The SARs expire between 2001 and 2006. Under the Company's 1996 SAR Plan, as of December 31, 1997, the Company has granted 380,000 outstanding SARs (with an exercise price of $1.50 per share) to six employees. The SARs expire between 2002 and 2006. During 1997, a total of 203,000 SARs were exercised under both plans. 10. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "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, 1996, and December 31, 1997, are as follows:
1996 1997 ---- ---- Deferred tax assets: Operating loss carryforwards $ 13,365,772 $ 16,131,213 Differences between book and tax basis of property 34,019 56,148 ------------ ------------ 13,399,791 16,187,361 Deferred tax liabilities: Differences between book and tax basis of property (106,819) (181,104) ------------ ------------ 13,292,972 16,000,257 Valuation Allowance (13,292,972) (16,000,257) ------------ ------------ Net deferred tax asset $ 0 $ 0 ============ ============
The increase in the valuation allowance for the year ended December 31, 1996 and 1997, was approximately $3.3 million and $2.7 million respectively. There was no provision or benefit for federal income taxes as a result of the net operating loss in the current year. F-12 At December 31, 1997, the Company has Federal net operating loss carryovers of approximately $45.7 million. These carryovers may be subject to certain limitations and will expire between the years 1998 and 2012. 11. COMMITMENTS At December 31, 1997, future aggregate minimum lease commitments under non-cancelable operating leases, which expire in 1999 and 2001, were approximately $980,000. The leases contain customary escalation clauses, based principally on real estate taxes. Rent expense related to these leases for the years ended December 31, 1995, 1996 and 1997 aggregated $176,264, $129,600, and $330,430 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, 1997, the Company is committed to expend a total of approximately $2.7 million under these agreements. 12. 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. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS For financial instruments, including cash and cash equivalents, accounts receivable and payable, and accruals, the carrying amounts approximated fair value because of their short maturity. 14. INVESTMENT AND ADJUSTMENTS In January 1995, the Company invested $274,325 in the common stock (approximately 15% of ownership interest) of a company (the "Licensee"), which had licensed the Company's Individualized Programming for commercialization in special-purpose theaters. The Company also performed executive production services for the Licensee on a fee basis. During 1996, the Company recorded license fee and production service revenue from the Licensee of $16,789 and $199,666, respectively. At December 31, 1996, the Company had unpaid receivables pursuant to such revenues of $82,746. During 1997, the Licensee filed for liquidation under United States Bankruptcy laws. In anticipation of such filing, at December 31, 1996 the Company provided a reserve for the full amount of the receivables outstanding of $82,746 and a valuation allowance for its full investment in the Licensee of $274,325. 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the year ended December 31, 1995, the Company made non-recourse loans to certain employees to purchase the Company's common stock by exercising options. The consolidated balance sheet at December 31, 1996, reflects non-cash activity during the year ended December 31, 1996, that relates to a reversal of certain of these option exercises and resulting non-recourse loan transactions: a decrease in notes receivable from stock sales and a decrease in common stock and additional paid-in capital of $367,500. The Company made no cash payments of interest or income taxes during the years ended December 31, 1996 and 1997. 16. RESTATMENT F-13 Subsequent to the issuance of the 1996 and 1997 financial statements, management determined that the Company's consolidated financial statements for the years ended December 31, 1996 and 1997, should be restated to conform with the Financial Accounting Standards Board's Emerging Issues Task Force - Topic D60 ["Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature"] issued March 13, 1997, which formally announced the SEC staff's position that any discounts resulting from an allocation of proceeds to the beneficial conversion feature is analogous to a dividend and should be recognized as a return to the preferred shareholders over the minimum conversion period. As a result of this restatement, loss applicable to common shareholders increased by $1,500,000 ($.13 per share) and $2,500,000 ($.19 per share), respectively, for the years ended December 31, 1996 and 1997. Revenues, expenses, net loss, total assets and total shareholders' equity are not affected by this restatement. F-14 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report 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 16th day of April 1998. ACTV, Inc. By: /s/ William C. Samuels ------------------------------------ William C. Samuels Chairman and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report 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, Chief April 16, 1998 - ------------------------ Executive Officer, President and William C. Samuels Director /s/ David Reese Executive Vice President, President - April 16, 1998 - ------------------------ ACTV Entertainment, Inc., and David Reese Director /s/ Bruce Crowley Executive Vice President, President - April 16, 1998 - ------------------------ ACTV Net Inc., and Director Bruce Crowley /s/ Christopher C. Cline Senior Vice President, Chief April 16, 1998 - ------------------------ Financial Officer and Secretary Christopher C. Cline /s/ William Frank Director April 16, 1998 - ------------------------ William A. Frank /s/ Richard Hyman Director April 16, 1998 - ------------------------ Richard Hyman /s/ Jess Ravich Director April 16, 1998 - ------------------------ Jess Ravich /s/ Steven W. Schuster Director April 16, 1998 - ------------------------ Steven W. Schuster -----END PRIVACY-ENHANCED MESSAGE-----