-----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, SwPnjuwHw5u40njTlw8cfPQw9CPZFbaX19R8RiO4TlQdzGbdDHEtJAmg9oHPezrj ZBG33KowOhYMoRWHJ0b+Dg== 0000950146-98-000880.txt : 19980518 0000950146-98-000880.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950146-98-000880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98626545 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 FORM 10-Q 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 March 31, 1998 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 --- --- As of May 15, 1998, there were 18,164,668 shares of the registrant's common stock outstanding. ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS December 31, March 31, 1997 1998 (as restated, see Note 7) -------------- ------------ Current Assets: Cash and cash equivalents......................... $ 554,077 $ 3,071,619 Accounts receivable-net........................... 303,044 517,756 Education equipment inventory..................... 237,757 237,757 Other............................................. 308,653 398,423 ------------ ------------ Total current assets.......................... 1,403,531 4,225,555 ------------ ------------ Property and equipment-net............................. 2,596,785 2,593,080 ------------ ------------ Other Assets: Patents and patents pending....................... 279,356 321,520 Software development costs........................ 669,852 688,486 Goodwill 2,641,188 2,534,595 Other............................................. 311,206 612,961 ------------ ------------ Total other assets............................ 3,901,602 4,157,562 ============ ============ Total ................................... $ 7,901,918 $ 10,976,197 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses.............. $ 1,882,159 $ 1,354,830 Deferred stock appreciation rights................. -- 63,594 Preferred dividends payable........................ 603,469 669,939 ------------ ------------ Total current liabilities...................... 2,485,628 2,088,363 Long-Term Liabilities Notes Payable -- 3,679,877 Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, issued and outstanding 86,200 at December 31, 1997 and March 31, 1998............. 8,620 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 316,944 at December 31, 1997, 281,823 at March 31, 1998..... 7,029,708 6,138,514 Common stock, $.10 par value, 65,000,000 shares authorized: issued and outstanding 14,614,611 at December 31, 1997, 16,980,581 at March 31, 1998... 1,461,461 1,698,058 Additional paid-in capital......................... 48,140,596 52,325,411 Notes receivable from stock sales.................. (199,900) (1,166,314) Accumulated deficit................................ (51,024,195) (53,796,332) ------------ ------------ Total shareholders' equity..................... 5,416,290 5,207,957 ------------ ------------ Total..................................... $ 7,901,918 $ 10,976,197 ============ ============
See Notes to Consolidated Financial Statements ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, 1997 (as restated, see Note 7) 1998 ---------- ---------- Revenues: Revenues.................................. $ 907,944 $ 361,247 ---------- ---------- Total revenues......................... 907,944 361,247 Cost of Sales............................. 279,491 47,603 ---------- ---------- Gross profit........................... 628,453 313,644 Expenses: Operating expenses........................ 346,290 362,714 Selling and administrative................ 1,984,845 2,043,516 Depreciation and amortization............. 47,980 212,501 Amortization of goodwill.................. 106,593 106,593 Stock appreciation rights................. (277,037) 63,594 ---------- ---------- Total expenses......................... 2,208,671 2,788,918 Interest (income)............................ (58,137) (39,840) Interest expense............................. -- 200,044 ---------- ---------- Interest expense (income) - net........... (58,137) 160,204 ---------- ---------- Net loss..................................... 1,522,081 2,635,478 Preferred stock dividends and accretions..... 749,221 136,659 Loss applicable to common stock shareholders................................. $2,271,302 $2,772,137 ========== ========== Basic loss per common share.................. $ .19 $ .17 Weighted average number of common shares outstanding.................................. 11,829,110 16,088,087
See Notes to Consolidated Financial Statements ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 1997 (as restated, see Note 7) 1998 ----------- ----------- Cash flows from operating activities: Net loss applicable to common shareholders.............................. $(2,271,302) $(2,772,137) ----------- ----------- Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization............. 207,535 319,094 Stock appreciation rights................. (631,662) 63,594 Amortization of Stock Warrants............ -- 52,362 Stock issued in lieu of cash compensation.............................. -- 295,139 Common stock issued or reserved for preferred dividends and accretions........ 627,679 70,189 Changes in assets and liabilities: Accounts receivable....................... (523,151) (214,712) Education equipment inventory............. 9,093 Other assets.............................. (40,445) (69,339) Accounts payable and accrued expenses..... 214,507 (527,329) Preferred stock dividends payable......... 121,542 66,470 Net cash used in operating activities............................ (2,286,204) (2,716,669) ----------- ----------- Cash flows from investing activities: Investment in patents pending............. -- (50,000) Investment in property and equipment...... (90,787) (166,027) Investment in systems..................... -- (53,566) ----------- ----------- Net cash used in investing activities.......... (90,787) (269,593) Cash flows from financing activities: Net proceeds from debt issuance........... -- 4,677,814 Redemption of preferred stock............. (9,565) (565,759) Proceeds from equity financing............ -- 1,391,749 ----------- ----------- Net cash provided by financing activities...... (9,565) 5,503,804 ----------- ----------- Net (decrease) increase in cash and cash equivalents ................................. (2,386,556) 2,517,542 Cash and cash equivalents, beginning of period....................... 6,520,756 554,077 ----------- ----------- Cash and cash equivalents, end of period............................. 4,134,200 3,071,619 =========== ===========
See Notes to Consolidated Financial Statements. Supplemental disclosure of cash flow information: See Note 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1998 1(a) 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. 1(b) Management of the Company believes that its current funds 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. 2. For a summary of significant accounting policies and additional financial information, see the Company's Annual Report on Form 10-K/A1 for the year ended December 31, 1997. 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 March 31, 1998 and December 31, 1998 reflect capitalized software production costs of $688,486 and $669,852, respectively, classified as a component of "Other" non-current assets. 3. The Company's balance sheets at March 31, 1998 and December 31, 1997 also reflect a debit to shareholders' equity of $1,166,314 related to (a) a loan made by the Company to an employee in August 1995 (March 31, 1998 and December 31, 1997 balance of $199,900) and (b) loans made to three employees in the first three months of 1998 (March 31, 1998 balance of $966,414). All of the loans were made to enable the employees to purchase the Company's common stock by exercising options. The loans have due dates that correspond to the respective expiration dates of the options exercised. Pursuant to the employment contracts of the employees to whom the 1998 loans were made, each loan will be forgiven if the respective employee remains employed by the Company on January 1, 1999. Therefore, the Company is recognizing compensation expense for the total amount of each 1998 loan on a pro-rata basis over the period from the issuance of the loan through January 1, 1999. Such compensation expense recorded for the three months ended March 31, 1998 was $260,638. 4. 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. For accounting purposes the Company has allocated approximately $1.2 million to the Warrant, which is reflected as a credit to additional paid-in capital. The $1.2 million is being charged as additional interest expense over the life of the Note. 5. 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% exchangeable preferred stock (the "Exchangeable Preferred Stock") issued by its wholly-owned subsidiary and convertible into shares of the Company ($9.1 million in net proceeds). The Exchangeable 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 Exchangeable 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 Exchangeable 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 Exchangeable Preferred Stock will elect to convert their stock into Common Stock of the Company and, accordingly, has included the Exchangeable Preferred Stock in its consolidated statement of shareholders' equity. The Exchangeable 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. A preferred stock accretion of $625,000 was recorded for the three months ended March 31, 1997, as restated (see Note 7 below). 6. The consolidated balance sheet at March 31, 1998, reflects non-cash activity during the three month period ended March 31, 1998, that relates to a the option exercises and resulting non-recourse loan transactions described in Note 3 above: an increase in notes receivable from stock sales and an increase in common stock and additional paid-in capital of a total of $1,227,053. The Company made no cash payments of interest or income taxes during the three months ended March 31, 1997, or March 31, 1998. 7. Subsequent to the issuance of the Company's 1996 and 1997 financial statements, management determined that the Company's consolidated financial statements for years 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 for the three months ended March 31, 1997 increased by $625,000 ($.04 per share. Revenues, expenses, net loss, total assets and total shareholders' equity are not affected by this restatement. 8. Had the Company reported its results on a fully diluted basis for the three month periods ended March 31, 1998 and March 31, 1997, basic loss per common share would have been $.10 for both periods. 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") 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 $54 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. 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 more than 5 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 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 Three Month Periods Ended March 31, 1998 and March 31, 1997 - ------------------------------------------------------------------------- During the three month period ended March 31, 1998 ("First Quarter 1998"), the Company's revenues decreased 60.2%, to $361,247, from $907,944 in the three month period ended March 31, 1997 ("First Quarter 1997"). The Company was able to recognize only of portion of total revenues contracted during First Quarter 1998, unlike 1997, due to its conformity with a new American Institute of Certified Public Accountants' Statement of Position 97-2, which mandates for fiscal years beginning after December 15, 1997 that software companies defer revenue recognition until 100% of software and related services are delivered. All but 2% of the Company's revenues in First Quarter 1998 were derived from Internet sales, compared to First Quarter 1997, when all revenues were related to television-based education hardware and content. The cost of sales, as a percentage of sales revenue, decreased to 13% in the more recent quarter as compared to 31% in the corresponding 1997 quarter. The decrease was the result of the shift in the more recent quarter, as noted above, to the sale of Internet products and services, which carry a higher profit margin than the Company's television-based education revenue sources. Total expenses excluding cost of sales and interest expense increased approximately 26%, by $580,247 in First Quarter 1998, to $2,788,918, from $2,208,671 in First Quarter 1997. The increase was due principally to increases in stock appreciation rights (SARs) expense and depreciation expense. The Company recognized an expense related to SARs of $63,594 in the more recent quarter, compared to income in the amount of $277,037 in First Quarter 1997. The difference of $340,631 was the result of an increase in the price of ACTV, Inc.'s common stock during First Quarter 1998, compared to a price decrease during First Quarter 1997. Depreciation and amortization expense increased $164,521 in First Quarter 1998 to $319,094, from $154,573 in First Quarter 1997, due to higher depreciation in the more recent quarter related primarily to the Company's master control facility in Texas, which was completed in the last quarter of 1997. The Company incurred interest expense and accretion in the First Quarter of 1998 of $200,204, compared to $0 interest expense and accretion in First Quarter 1997. The increase was the result of the issuance of debt and associated warrants in January 1998 by a wholly-owned subsidiary of the Company. Interest income in First Quarter 1998 was $39,840, a decrease of 31%, compared with $58,137 in First Quarter 1997. The decrease resulted from lower available cash balances and prevailing market interest rates in the more recent period. For First Quarter 1998 and First Quarter 1997, the Company accrued $66,470 for dividends and $746,542 for dividends and accretions, respectively, related to exchangeable preferred stock issued in August 1996 by one of its wholly-owned subsidiaries. The Company paid $70,189 and $2,679 in preferred dividends during First Quarter 1998 and First Quarter 1997, respectively, by issuing shares of common stock of ACTV, Inc. For First Quarter 1998, the Company's net loss applicable to common shareholders was $2,772,137 or $.17 per share, an increase of 22% compared to the net loss of $2,271,302 or $.19 per share in First Quarter 1997. The increase in loss applicable to common shareholders during the more recent quarter was the result of lower gross revenues and higher depreciation expense, stock appreciation rights expense and interest and accretion expense in the more recent quarter. Comparison of Three Month Periods Ended March 31, 1997 and March 31, 1996 - ------------------------------------------------------------------------- During the three month period ended March 31, 1997 ("First Quarter 1997"), the Company's revenues increased approximately 2.6 times, to $907,944, from $350,674 in the three month period ended March 31, 1996 ("First Quarter 1996"). In the more recent quarter, most of the Company's revenues derived from distance learning education sales. Revenues in First Quarter 1995 were derived from sales to the education market as well as from license and executive producer fees. The cost of sales, as a percentage of sales revenue, decreased to 31% in the more recent quarter as compared to 59%, in the corresponding 1996 quarter. The decrease was the result of a preponderance of distance learning sales in more recent quarter, which carry a higher profit margin than much of the Company's other revenue sources. Total expenses excluding cost of sales and interest expense decreased approximately 19%, by $528,113 in First Quarter 1997, to $2,208,671, from $2,736,784 in First Quarter 1996. The decrease was due principally to lower stock appreciation rights (SARs) expense, and depreciation expense. The Company recognized net income related to SARs, in the amount of $277,037, in the more recent quarter, as compared to an expense of $393,591 in the corresponding period last year. The difference was the result of a decrease in the price of ACTV, Inc.'s common stock during the First Quarter 1997. The Company also incurred higher research and development costs in First Quarter 1997 related principally to digital set-top terminal software and Internet product development. Depreciation and amortization expense decreased $139,899 in First Quarter 1997 to $154,573, from $294,472 in First Quarter 1996, due to the full depreciation of video program inventory in 1996. The Company incurred no interest expense in the First Quarter of 1997, or the First Quarter of 1996. Interest income in First Quarter 1997 was $58,137, an increase of over 75%, compared with $33,237 in First Quarter 1996. The increase resulted from higher available cash balances and prevailing market interest rates in the more recent period. For the quarter ended March 31, 1997, the Company accrued $746,542 for dividends and accretions related to exchangeable preferred stock issued in August 1996 by one of its wholly-owned subsidiaries. The Company paid $2,679 in preferred dividends during First Quarter 1997 by issuing shares of common stock of ACTV, Inc. For First Quarter 1997, the Company's loss applicable to common shareholders was $2,271,302 or $.19 per share, a decrease of 11.3%, compared to the loss of $2,560,883, or $.22 per share, in First Quarter 1996. The decrease in net loss during the more recent quarter was the result of significantly higher revenues combined with an overall reduction in total expenses. 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 March 31, 1998, the Company had an accumulated deficit of approximately $54 million. The Company's cash position on March 31, 1998 was $3,071,619, compared to $554,077 on December 31, 1997. During First Quarter 1998 the Company used $2,716,669 in cash for its operations, compared with $2,286,204 in First Quarter 1997. The increase in First Quarter 1998 was due principally to a greater use of cash related to changes in assets and liabilities. The Company met its cash needs in First Quarter 1998 from a series of private placements of the Company's common stock (net proceeds of $1.4 million) with an institutional investor during the first three months of 1997 and from the issuance of debt by a wholly-owned subsidiary (net proceeds of $4.7). The Company met its cash needs in First Quarter 1997 from the remaining proceeds from the private sale of exchangeable preferred stock effected in August 1996. With respect to investing activities, in First Quarter 1998 and 1997 the Company used cash of $269,593 and $90,787, respectively. Investing activities, in the more recent quarter, were related to television and computer equipment, patents and systems, while such activities in the 1996 Quarter related to leasehold improvements. The Company's balance sheets at March 31, 1998 and December 31, 1997 reflect expense accruals of $63,594 and $0, respectively, related to the Company's stock appreciation rights plan. During April 1998, the Company raised approximately $200,000 in net proceeds from the private sale of common stock to an institutional investor. 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. 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 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 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. 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. 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 (a) Exhibits 11 Computation of Loss per Share 27 Financial Data Schedule (b) Reports on Form 8-K: None. 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: May 15, 1997 /s/ William C. Samuels ------------ ---------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: May 15, 1997 /s/ Christopher C. Cline ------------ ------------------------ Christopher C. Cline Senior Vice President (principal financial and accounting officer) EX-11 2 COMPUTATION OF LOSS PER SHARE EXHIBIT 11 ACTV, INC. AND SUBSIDIARIES COMPUTATION OF LOSS PER SHARE
Three Months Ended March 31, 1997 1998 (as restated, see Note 7) --------------- --------------- Weighted average shares outstanding.......... 11,829,110 16,088,087 Common stock equivalents -- -- --------------- --------------- Total............................... 11,829,110 16,088,087 =============== =============== Net loss..................................... $2,271,302 $2,772,137 =============== =============== Basic loss per common share.................. $.19 $.17
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1997, AND MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 0000854152 ACTV, INC. 3-Mos 3-Mos DEC-31-1997 DEC-31-1998 JAN-1-1997 JAN-1-1998 MAR-31-1997 MAR-31-1998 4,134,200 3,071,619 0 0 933,344 560,944 0 43,188 328,411 237,757 5,632,400 4,225,555 1,542,739 3,599,145 769,928 1,006,065 9,743,823 10,976,197 2,195,943 2,088,363 0 3,679,877 0 0 0 8,620 1,183,874 1,698,058 2,702,711 3,501,279 9,743,823 10,976,197 907,944 361,247 907,944 361,247 279,491 47,603 2,208,671 2,406,230 124,221 479,507 0 0 0 200,044 (2,771,302) (2,772,137) 0 0 (2,771,302) (2,772,137) 0 0 0 0 0 0 (2,271,302) (2,772,137) .19 (.17) .19 (.17)
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