-----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, LK4c2Wdewp6MbzwG2wPZpmF8ecmlgqEihH93cKy9e4ZKefaRAv4JGXZwCvsO0f6f zPoQ/fdTn1Vsy60O8H4ynQ== 0000950146-98-001407.txt : 19980817 0000950146-98-001407.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950146-98-001407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: BSE SROS: NASD 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: 98691308 BUSINESS ADDRESS: STREET 1: 1270 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2122622571 MAIL ADDRESS: STREET 1: 12270 AVE OF THE AMERICAS #2401 STREET 2: 12270 AVE OF THE AMERICAS #2401 CITY: NEW YORK STATE: NY ZIP: 10020 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 13, 1998, there were 23,645,527 shares of the registrant's common stock outstanding. ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS December 31, June 30, 1997 1998 (as restated) (unaudited) -------------- -------------- Current Assets: Cash and cash equivalents......................... $554,077 $1,810,396 Accounts receivable-net........................... 303,044 780,913 Education equipment inventory..................... 237,757 204,719 Other............................................. 308,653 939,700 -------------- -------------- Total current assets.......................... 1,403,531 3,735,728 -------------- -------------- Property and equipment-net............................. 2,596,785 2,430,606 -------------- -------------- Other Assets: Patents and patents pending....................... 279,356 491,641 Software development costs........................ 669,852 856,933 Goodwill ......................................... 2,641,188 2,428,002 Other............................................. 311,206 624,459 -------------- -------------- Total other assets............................ 3,901,602 4,401,035 -------------- -------------- Total ................................... $7,901,918 $10,567,369 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses.............. $1,882,159 $ 960,876 Deferred stock appreciation rights................. -- 396,279 Preferred dividends payable........................ 603,469 660,329 -------------- -------------- Total current liabilities...................... 2,485,628 2,017,484 Long-Term Liabilities: Notes Payable -- 4,061,500 Shareholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized, issued and outstanding 86,200 at December 31, 1997, 84,600 at June 30, 1998....... 8,620 8,460 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, 222,297 at June 30, 1998... 7,029,708 4,663,514 Common stock, $.10 par value, 65,000,000 shares authorized: issued and outstanding 14,614,611 at December 31, 1997, 19,946,860 at June 30, 1998... 1,461,461 1,994,686 Additional paid-in capital......................... 48,140,596 55,767,301 Notes receivable from stock sales.................. (199,900) (885,843) Accumulated deficit................................ (51,024,195) (57,059,733) -------------- -------------- Total shareholders' equity..................... 5,416,290 4,488,385 -------------- -------------- Total..................................... $7,901,918 $10,567,369 ============== ==============
See Notes to Consolidated Financial Statements 2 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Month Periods Three Month Periods Ended June 30, Ended June 30, 1997 1998 1997 1998 (as restated) (as restated) -------------- --------------- --------------- --------------- Revenues: Sales revenues.................... $ 1,342,855 $ 756,660 $ 434,911 $ 395,413 -------------- --------------- --------------- --------------- Total revenues................. 1,342,855 756,660 434,911 395,413 Cost of Sales..................... 355,440 123,389 75,949 75,786 -------------- --------------- --------------- --------------- Gross profit................... 987,415 633,271 358,962 319,627 Expenses: Operating expenses................ 711,440 980,627 365,150 617,913 Selling and administrative........ 3,613,256 3,903,848 1,628,411 1,860,332 Depreciation and amortization..... 98,488 514,263 50,508 301,762 Amortization of goodwill.......... 213,186 213,186 106,593 106,593 Stock appreciation rights......... (317,241) 396,279 (40,204) 332,685 -------------- --------------- --------------- --------------- Total expense................... 4,319,129 6,008,203 2,110,458 3,219,285 Interest (income)................. (92,083) (65,321) (33,946) (25,481) Interest expense.................. -- 463,977 -- 263,933 -------------- --------------- --------------- --------------- Interest expense (income) - net (92,083) 398,656 (33,946) 238,452 -------------- --------------- --------------- --------------- Net loss............................. 3,239,631 5,773,588 1,717,550 3,138,110 Preferred stock dividends and accretions.......................... 1,499,394 261,950 750,173 125,291 -------------- --------------- --------------- --------------- Net loss applicable to common stock shareholders........................ $ 4,739,025 $6,035,538 $2,467,723 $ 3,263,401 ============== =============== =============== =============== Basic and diluted loss per common share................... $ .40 $ .35 $ .21 $ .18 Weighted average number of common shares outstanding.................. 11,916,823 17,219,660 12,003,573 18,371,395
See Notes to Consolidated Financial Statements 3 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Month Periods Three Month Periods Ended June 30, Ended June 30, 1997 1998 1997 1998 (as restated) (as restated) --------------- --------------- --------------- --------------- Cash flows from operating activities: Net loss $4,739,025 $6,035,538 $2,467,723 $3,263,401 --------------- --------------- --------------- --------------- Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization............. 311,674 727,449 157,101 408,355 Stock appreciation rights................. (671,866) 396,279 (40,204) 332,685 Amortization of warrants and deferred expenses related to debt financing...... -- 142,074 -- 89,712 Common stock issued for services.......... 15,000 1,145,052 15,000 849,913 Common stock issued or reserved for preferred dividends and accretions...... 1,271,408 205,090 643,729 134,901 Notes issued in lieu of cash interest payments............................... -- 318,924 -- -- Changes in operating assets and liabilities: Accounts receivable....................... (450,945) (477,869) 72,206 (263,157) Education equipment inventory............. 25,235 33,038 16,142 33,038 Other assets.............................. (146,903) (719,642) (159,420) (650,303) Accounts payable and accrued expenses..... (40,193) (921,283) (254,700) (75,030) Preferred stock dividends payable......... 227,985 56,860 106,443 (9,610) --------------- --------------- --------------- --------------- Net cash (used) in operating activities....................... (4,197,630) (5,129,566) (1,911,426) (2,412,897) --------------- --------------- --------------- --------------- Cash flows from investing activities: Investment in patents pending............. -- (227,401) -- (177,401) Investment in property and equipment...... 223,267 (232,686) 132,480 (66,659) Investment in software development........ 399,460 (216,846) 399,460 (163,280) --------------- --------------- --------------- --------------- Net cash used in investing activities ............................. 622,727 (676,933) 531,940 (407,340) --------------- --------------- --------------- --------------- Cash flows from financing activities: Net proceeds from debt issuance........... -- 4,677,814 -- -- Redemption of preferred stock............. -- (565,759) -- -- Proceeds from sale of common stock........ -- 2,950,763 -- 1,559,014 Expense related to convertible preferred stock issuance.......................... (9,565) -- -- -- --------------- --------------- --------------- --------------- Net cash provided by (used in) financing activities................................... (9,565) 7,062,818 -- 1,559,014 --------------- --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents ................................. (4,829,922) 1,256,319 (2,443,366) (1,261,223) Cash and cash equivalents, beginning of period..................... 6,520,756 554,077 4,134,200 3,071,619 --------------- --------------- --------------- --------------- Cash and cash equivalents, end of period........................... 1,690,834 1,810,396 1,690,834 1,810,396 =============== =============== =============== ===============
4 ACTV, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements for the Six Months Ended June 30, 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, taking into account approximately $2.75 million dollars in equity financing completed in July 1998, will enable the Company to finance its operations 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. While the Company believes that it has adequate funds to launch its planned Southwest Regional Network, it (i) may need additional funding to operate the network at planned levels and (ii) will need additional funding to launch networks in other regions. 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 operate the Southwest Regional Network at planned 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 development once technological feasibility is established upon completion of a detailed program design or upon completion of a working model. 3. The Company's balance sheets at June 30, 1998 and December 31, 1997 also reflect a debit to shareholders' equity of $885,843 related to (a) a loan made by the Company to an employee in August 1995 (June 30, 1998 and December 31, 1997 balance of $199,900) and (b) loans made to four employees in the first six months of 1998 (June 30, 1998 balance of $685,943). 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 six months ended June 30, 1998 was $603,610. 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 5 Network, and is guaranteed by ACTV, Inc. The Issuer elected to pay the semi-annual interest payment due June 30, 1998 in kind rather than in cash. 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, had the Company formed and capitalized 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 had a one-time option to purchase notes from such entity on the same terms and conditions as the Texas Network financing. This option expired unexercised on June 30, 1998. 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 private placement agreement provided for the Exchangeable Preferred Stock to be 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 $1,250,000 was recorded for the six months ended June 30, 1997, as restated (see Note 7 below). 6 6. The consolidated balance sheet at June 30, 1998, reflects non-cash activity during the six month period ended June 30, 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 of $685,943 (net of compensation expense of $603,610 and an increase in common stock and additional paid-in capital of a total of $1,289,553. The Company made no cash payments of interest or income taxes during the three months ended June 30, 1997, or June 30, 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 six months ended June 30, 1997 increased by $1,250,000 ($.10 per share). Revenues, expenses, net loss, total assets and total shareholders' equity are not affected by this restatement. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY To the extent that the information presented in this Form 10-Q discusses financial projections, information or expectations about the Company's products or markets, or otherwise makes statements about future events, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These include, among others, the successful and timely development and acceptance of new products and markets and the availability of sufficient funding to effect such product and/or market development. ACTV, Inc. ("the Company") has developed proprietary technologies for individualized television programming ("Individualized Programming") and for the Internet. 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 creates "virtual communities" for education. (Java is a programming language developed for the Internet by Sun Microsystems.) eSchool integrates Web content and other media with collaborative groupware functionality to create interactive environments for students and instructors. 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 $57.1 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, individualized television 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. 8 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 region 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. 9 The target market for the Company's Internet 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 Internet software and related services and of 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. 10 RESULTS OF OPERATIONS Comparison of Six Month Periods Ended June 30, 1998 and June 30, 1997 During the six month period ended June 30, 1998, the Company's revenues decreased 44% to $756,660, from $1,342,855 in the six month period ended June 30, 1997. Nearly all of the Company's revenues in the more recent six-month period were derived from Internet sales, compared to the comparable 1997 six-month period, when the majority of revenues were related to television-based education hardware and content. Cost of sales in the six months ended June 30, 1998, was $123,389, a decrease of 65% over cost of sales of $355,440 in the six months ended June 30, 1997. The Company's gross margin increased to 84% in the more recent period, from 74% in the corresponding 1997 period. The increase was the result of the change in the composition of products sold during the six months ended June 30, 1998, as noted above, in favor 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 in the six months ended June 30, 1998, increased 39%, to $6,008,203, from $4,319,129 in the comparable period in 1997. The increase was due to (i) higher operating and selling and administrative expenses associated with the Southwest Regional Network; (ii) higher depreciation and amortization expenses; and (iii) higher stock appreciation rights expenses, the result of an increase in the market price of the Company's common stock. Depreciation and amortization expense for the six months ended June 30, 1998, increased 133% to $727,449, from $311,674 for the six months ended June 30, 1997. This increase was due principally to higher depreciation expenses related to the Southwest Regional Network's master control production facility. Interest income in the six months ended June 30, 1998, was $65,321, compared with $92,083 in the six months ended June 30, 1997. The decrease was due to lower average cash balances during the more recent period. The Company incurred interest expense and accretions of $398,656 in the six months ended June 30, 1998, compared to no interest expense during the comparable 1997 period. Interest expense is related to the $5 million principal value notes issued in January 1998 by a subsidiary of the Company. The Company chose to pay the interest due June 30, 1998 in kind rather than in cash. For the six month periods ending June 30, 1998 and June 30, 1997, the Company accrued $261,950 for dividends and $1,499,394 for dividends and accretions, respectively, related to its outstanding preferred stock. The Company paid $205,090 and $21,408 in preferred dividends during the six month periods ending June 30, 1998 and June 30, 1997, respectively, by issuing shares of common stock of ACTV, Inc. For the six months ended June 30, 1998, the Company's net loss applicable to common shareholders was $6,035,538, or $.35 per share, an increase of 27% over the net loss of $4,739,025, or $.40 per share, incurred in the prior year's comparable period. The increase during the more recent six-month period was the result of higher overall expenses, led by higher stock appreciation rights and depreciation and amortization expenses, coupled with lower total revenues. 11 Comparison of Six Month Periods Ended June 30, 1997 and June 30, 1996 During the six month period ended June 30, 1997, the Company's revenues increased 74% to $1,342,855 from $773,596 in the six month period ended June 30, 1996. All revenues in the six month period ended June 30, 1997 were derived from the education market, while in the 1996 six-month period, 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 significantly higher sales of distance learning products and services. Cost of sales in the six months ended June 30, 1997, was $355,440, an increase of 13% over cost of sales of $314,610 in the six months ended June 30, 1996. The Company's gross margin increased to 74% in the more recent period, from 59% in the corresponding 1996 period. The increase was due to a greater proportion of total revenues from higher margin products such as programs and software fees during the more recent period. In addition, the Company recorded no executive production fee revenues in the more recent period, unlike the 1996 period in which these lower margin services were a component of total revenues. Total expenses excluding cost of sales and interest expense in the six months ended June 30, 1997, declined slightly, to $4,319,129, from $4,567,875 in the comparable period in 1996. The decrease was due to lower amortization and stock appreciation rights expenses, which more than offset moderately higher selling and administrative costs during the 1997 period. Depreciation and amortization expense for the six months ended June 30, 1997, decreased 42% to $311,674, from $538,422 for the six months ended June 30, 1996. This decrease was due to the recognition during the 1996 period of amortization expense for certain programming assets that were fully amortized during 1996. Interest income in the six months ended June 30, 1997, was $92,083, compared with $55,870 in the six months ended June 30, 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either six-month period. For the six months ended June 30, 1997, the Company accrued $1,499,394 for dividends and accretions related to exchangeable preferred stock issued in August 1996 by one of its wholly-owned subsidiaries. For the six months ended June 30, 1997, the Company's net loss applicable to common shareholders was $4,739,025, or $.40 per share, an increase of 17% over the net loss of $4,053,019, or $.35 per share, incurred in the prior year's comparable period. The increase was the result principally of higher dividends and accretions in the six months ended June 30, 1997, which more than compensated for greater total revenues and higher gross profit during the more recent period. 12 Comparison of Three Month Periods Ended June 30, 1998 and June 30, 1997 During the three month period ended June 30, 1998 ("Second Quarter 1998"), the Company's revenues decreased approximately 9%, to $395,413, from $434,911 in the three month period ended June 30, 1997 ("Second Quarter 1997"). In the more recent quarter, all of the Company's revenues derived from Internet sales, while in Second Quarter 1997 the Company recorded revenues from both Internet sales and from television-based education hardware and content. Cost of sales in Second Quarter 1998 was $75,786, compared to Second Quarter 1997's cost of sales of $75,949. The Company's gross margin decreased slightly to 81% in the more recent quarter, from 83% in the corresponding 1997 quarter. Total expenses excluding cost of sales and interest expense increased approximately 53% in Second Quarter 1998, to $3,219,285, from $2,110,458 in Second Quarter 1997. The increase was due principally to higher stock appreciation rights expense, depreciation and amortization expense, and operating, selling and administrative expenses in the more recent period. The higher stock appreciation rights expense was related to a higher market price for the Company's common stock at June 30, 1998, while the increase in depreciation, amortization, operating, selling and administrative expenses was principally attributable to the Company's Southwest Regional Network. Depreciation and amortization expense increased 160% in Second Quarter 1998 to $408,355, from $157,101 in Second Quarter 1997. This increase was due principally to higher depreciation expenses related to the Southwest Regional Network's master control production facility. Interest income in Second Quarter 1998 was $25,481, compared with $33,946 in Second Quarter 1997. The decrease was due to lower average cash balances during the more recent period. The Company incurred interest expense and accretions of $263,933 in Second Quarter 1998, compared to no interest expense during the comparable 1997 period. Interest expense is related to the $5 million principal value notes issued in January 1998 by a subsidiary of the Company. The Company chose to pay the interest due June 30, 1998 in kind rather than in cash. For Second Quarter 1998 and Second Quarter 1997, respectively, the Company accrued $125,291 for dividends and $750,173 for dividends and accretions, respectively, related to its outstanding preferred stock. The Company paid $133,141 and $18,729 in preferred dividends during the six month periods ending June 30, 1998 and June 30, 1997, respectively, by issuing shares of common stock of ACTV, Inc. The Company's net loss applicable to common shareholders in Second Quarter 1998 increased approximately 32%, to $3,263,401, or $.18 per share, from $2,467,723, or $.21 per share, in Second Quarter 1997, principally due to higher expenses associated with the Southwest Regional Network, as noted above. Comparison of Three Month Periods Ended June 30, 1997 and June 30, 1996 During the three month period ended June 30, 1997 ("Second Quarter 1997"), the Company's revenues increased approximately 3%, to $434,911, from $422,922 in the three month period ended June 30, 1996 ("Second Quarter 1996"). In the more recent quarter, all of the Company's revenues derived from education sales, while in Second Quarter 1996 the Company recorded revenues from both education sales and from license and executive producer fees. 13 Cost of sales in Second Quarter 1997 was $75,949, a 29% decrease compared to Second Quarter 1996's cost of sales of $106,600. The Company's gross margin increased to 82% in the more recent quarter, from 75% in the corresponding 1996 quarter. The gross margin increase was due principally to a greater percentage of higher margin education software sales in the revenue mix for the more recent quarter. Total expenses excluding cost of sales and interest expense increased approximately 15% in Second Quarter 1997, to $2,110,458, from $1,831,091 in Second Quarter 1996. The increase was due principally to a difference in stock appreciation rights expenses between the two periods. Depreciation and amortization expense decreased in Second Quarter 1997 to $157,101, from $243,950 in Second Quarter 1996. This decrease was due to the recognition during the 1996 quarter of amortization expense for certain programming assets that were fully amortized during 1996. Interest income in Second Quarter 1997, was $33,946, compared with $22,633 in Second Quarter 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either quarter. For the three months ended June 30, 1997, the Company accrued $750,173 for dividends and accretions related to exchangeable preferred stock issued in August 1996 by one of its wholly-owned subsidiaries. The Company's net loss applicable to common shareholders in Second Quarter 1997 increased approximately 65%, to $2,467,723, or $.21 per share, from $1,492,136, or $.13 per share, in Second Quarter 1996, principally the result preferred stock dividends and accretions and the noted difference in stock appreciation rights expense. 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 June 30, 1998, the Company had an accumulated deficit of approximately $57.1 million. The Company's cash position on June 30, 1998 was $1,810,396, compared to $554,077 on December 31, 1997. During the six month period ended June 30, 1998 the Company used $5,129,566 in cash for its operations, compared with $4,197,630 in the six months ended June 30, 1997. With respect to investing activities, during the six month period ended June 30, 1998 and 1997 the Company used cash of $676,933 and $622,727, respectively. Investing activities, in the more recent six-month period, were related to equipment purchases, software development and patents, while such activities in the 1997 period related to equipment purchases. leasehold improvements and software development costs. The Company met its cash needs in the six month period ended June 30, 1998 from the proceeds of the $5.0 million principal value note financing as well as from private sales of common stock to an institutional investor. The Company met its cash needs in the six month period ended June 30, 1997 from the remaining proceeds from the private sale of exchangeable preferred stock effected in August 1996. 14 During Second Quarter 1998 the Company used $2,412,897 in cash for its operations, compared with $1,911,426 in Second Quarter 1997. With respect to investing activities, in Second Quarter 1998 and 1997 the Company used cash of $407,340 and $531,940, respectively. Investing activities, in the more recent quarter, were related to patents, software development, and equipment purchases, while such activities in the 1997 quarter related were related to master control facility and other equipment purchased, leasehold improvements, and computer software production costs. The Company's balance sheets at June 30, 1998 and December 31, 1997 reflect expense accruals of $396,279 and $0, respectively, related to the Company's stock appreciation rights plan. During July 1998, the Company raised approximately $2.75 million 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. The Issuer elected to pay the semi-annual interest payment due June 30, 1998 in kind rather than in cash. 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, had the Company formed and capitalized 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 had a one-time option to purchase notes from such entity on the same terms and conditions as the Texas Network financing. This option expired unexercised on June 30, 1998. Management of the Company believes that its current funds, taking into account approximately $2.75 million dollars in equity financing completed in July 1998, will enable the Company to finance its operations 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 15 during this period. While the Company believes that it has adequate funds to launch its planned Southwest Regional Network, it (i) may need additional funding to operate the network at planned levels and (ii) will need additional funding to launch networks in other regions. 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 operate the Southwest Regional Network at planned levels. Impact of Inflation Inflation has not had any significant effect on the Company's operating costs. 16 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 On June 29, 1998 the Company held an Annual Meeting of Shareholders for which it solicited votes by proxy. The following is a brief description of the matters voted upon at the meeting and a statement of the number of votes cast for and against, and the number of abstentions as to each matter.
1. Election of directors: For Withheld David Reese 13,112,912 130,895 Steven W. Schuster 13,113,872 129,935 2. To approve the adoption of the Company's 1998 Stock Option Plan. For Against Abstain 5,374,163 454,889 76,260 3. To ratify the appointment of Deloitte & Touche, LLP as independent auditors of the Company. For Against Abstain 13,135,792 49,045 58,970
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. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTV, Inc. Registrant Date: August 13, 1998 /s/ William C. Samuels --------------- -------------------------------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: August 13, 1998 /s/ Christopher C. Cline --------------- -------------------------------------------- Christopher C. Cline Senior Vice President (principal financial and accounting officer) 18 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: August 13, 1998 /s/ William C. Samuels ------------------------------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: August 13, 1998 /s/ Christopher C. Cline ------------------------------------------- Christopher C. Cline Senior Vice President (principal financial and accounting officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JUN-30-1998 1,810,396 0 780,913 0 204,719 3,735,728 3,665,803 1,235,197 10,567,369 2,017,484 4,061,500 0 8,460 1,994,686 2,485,239 10,567,369 756,660 756,660 123,389 4,884,475 1,123,728 0 463,977 (6,035,538) 0 (6,035,538) 0 0 0 (6,035,538) .35 .35
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