-----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, WagNjTvXtcNRdlhE5qsB+n9fy6++oW7NnGVB4GjfedZlVMkrlTTQe5j2+oN7r1TL QvbGpDR/8i4Ws4R8iChDKw== 0000950146-99-000211.txt : 19990212 0000950146-99-000211.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950146-99-000211 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990211 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/A SEC ACT: SEC FILE NUMBER: 001-10377 FILM NUMBER: 99531053 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A2 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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) 217-1600 (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 November 18, 1998, there were 28,400,282 shares of the registrant's common stock outstanding. Introductory Note This amendment on Form 10-Q/A2 amends the Registrant's Quarterly Report on Form 10-Q/A filed by the Registrant on November 19, 1998 and is being filed to reflect the restatement of the Registrant's Consolidated Financial Statements (the "Restatement"). The Restatement reflects the presentation of Convertible Preferred Stock of Subsidiary as minority interest outside of Consolidated Shareholders' Equity (Deficiency), the recording of dividends and accretion of this Preferred Stock as minority interest and the presentation of the Warrant issued in January 1998 outside of Consolidated Shareholders' Equity (Deficiency). 2 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS December 31, September 30, 1997 1998 (as restated) (unaudited) - ----------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents......................... $554,077 $7,077,854 Accounts receivable-net........................... 303,044 578,841 Education equipment inventory..................... 237,757 176,548 Other............................................. 308,653 668,166 -------------- -------------- Total current assets.......................... 1,403,531 8,501,409 -------------- -------------- Property and equipment-net............................. 2,596,785 2,400,281 -------------- -------------- Other Assets: Patents and patents pending....................... 279,356 792,941 Software development costs........................ 669,852 989,252 Goodwill.......................................... 2,641,188 2,321,409 Other............................................. 311,206 610,327 -------------- -------------- Total other assets............................ 3,901,602 4,713,929 -------------- -------------- Total ................................... $7,901,918 $15,615,619 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Accounts payable and accrued expenses.............. $1,882,159 $826,914 Deferred stock appreciation rights................. -- 455,251 Preferred dividends payable........................ 603,469 670,503 -------------- -------------- Total current liabilities...................... 2,485,628 1,952,668 Long-Term Notes Payable -- 4,300,581 Put warrant 1,371,624 Preferred stock of a subsidiary, convertible into common shares of the parent, no par value, 436,000 shares authorized: issued and outstanding 316,944 at December 31, 1997, 185,449 at September 30, 1998. 7,029,708 3,742,314 Shareholders' equity (deficiency): Preferred stock, $.10 par value, 1,000,000 shares authorized, issued and outstanding 86,200 at December 31, 1997, 72,600 at September 30, 1998.... 8,620 7,260 Common stock, $.10 par value, 65,000,000 shares authorized: issued and outstanding 14,614,611 at December 31, 1997, 26,210,003 at September 30, 1998 1,461,461 2,621,000 Additional paid-in capital......................... 48,140,596 63,584,261 Loans receivable from stock sales.................. (199,900) (1,070,872) Accumulated deficit................................ (51,024,195) (60,893,217) -------------- -------------- Total shareholders' equity (deficiency)........ (1,613,418) 4,248,432 -------------- -------------- 3 Total..................................... $7,901,918 15,615,619 ============== ==============
See Notes to Consolidated Financial Statements 4 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Month Periods Three Month Periods Ended September 30, Ended September 30, 1997 1998 1997 1998 (as restated) (as restated) (as restated) (as restated) -------------- --------------- --------------- --------------- Revenues: Sales revenues.................... $1,534,295 $1,058,560 $ 191,440 $ 301,900 -------------- --------------- --------------- --------------- Total revenues................. 1,534,295 1,058,560 191,440 301,900 Cost of Sales..................... 434,287 168,934 78,847 45,545 -------------- --------------- --------------- --------------- Gross profit................... 1,100,008 889,626 112,593 256,355 Expenses: Operating expenses................ 957,516 1,718,627 246,076 738,000 Selling and administrative........ 4,919,822 6,462,024 1,306,566 2,558,176 Depreciation and amortization..... 150,210 810,984 51,722 296,721 Amortization of goodwill.......... 319,779 319,779 106,593 106,593 Stock appreciation rights......... (346,892) 455,251 (29,651) 58,972 -------------- --------------- --------------- --------------- Total expense................... 6,000,435 9,766,665 1,681,306 3,758,462 Interest (income)................. (103,239) (105,398) (11,156) (40,077) Interest expense.................. -- 718,220 -- 254,243 -------------- --------------- --------------- --------------- Interest expense (income) - net (103,239) 612,822 (11,156) 214,166 Minority interest - subsidiary preferred stock dividends and accretion............................ 2,245,435 379,161 746,041 117,211 -------------- --------------- --------------- --------------- Net loss............................. $7,042,623 $9,869,022 $2,303,598 $3,833,484 ============== =============== =============== =============== Basic and diluted loss per common share $.57 $.51 $.17 $.16 Weighted average number of common shares outstanding................... 12,338,339 19,309,832 13,171,584 23,422,018
See Notes to Consolidated Financial Statements 5 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Month Periods Three Month Periods Ended September 30, Ended September 30, 1997 1998 1997 1998 (as restated) (as restated) --------------- --------------- --------------- --------------- Cash flows from operating activities: Net loss....................................... $(7,042,623) $(9,869,022) $(2,303,598) $(3,833,484) --------------- --------------- --------------- --------------- Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization............. 469,989 1,130,763 158,315 403,314 Stock appreciation rights................. (701,517) 455,251 (29,651) 58,972 Amortization of warrants and deferred expenses related to debt financing...... -- 178,451 -- 36,377 Notes issued in lieu of cash.............. -- 494,618 -- 175,694 Common stock issued for services.......... 165,000 2,016,023 150,000 870,971 Common stock issued or reserved for preferred dividends and accretions........ 1,970,167 67,034 698,759 10,174 Changes in operating assets and liabilities: Accounts receivable....................... (178,304) (275,797) 272,641 202,072 Education equipment inventory............. (9,168) 61,209 (34,403) 28,171 Other assets.............................. (185,189) (327,329) (38,286) 392,313 Accounts payable and accrued expenses..... (51,405) (1,055,245) (11,212) (133,962) --------------- --------------- --------------- --------------- Net cash (used) in operating activities....................... (5,563,050) (7,124,044) (1,137,435) (1,789,388) --------------- --------------- --------------- --------------- Cash flows from investing activities: Investment in patents pending............. -- (534,561) -- (307,160) Investment in property and equipment...... (1,404,482) (360,180) (1,181,215) (127,494) Investment in systems..................... (531,948) (573,734) (132,488) (356,888) --------------- --------------- --------------- --------------- Net cash used in investing activities................................ (1,936,430) (1,468,475) (1,313,703) (791,542) --------------- --------------- --------------- --------------- Cash flows from financing activities: Net proceeds from debt issuance........... -- 3,318,080 -- 11,890 Net proceeds from Put Warrant ............ -- 1,371,624 -- -- Preferred stock dividends payable......... 275,269 312,137 47,284 107,047 Redemption of preferred stock............. -- (565,759) -- -- Proceeds from sale of common stock........ 2,718,435 10,680,214 2,728,000 7,729,451 --------------- --------------- --------------- --------------- Net cash provided by (used in) financing activities..................................... 2,993,704 15,116,296 2,775,284 7,848,388 --------------- --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents ................................. (4,505,776) 6,523,777 324,146 5,267,458 Cash and cash equivalents, beginning of period....................... 6,520,756 554,077 1,690,834 1,810,396 --------------- --------------- --------------- --------------- 6 Cash and cash equivalents, end of period............................. 2,014,980 7,077,854 2,014,980 7,077,854 =============== =============== =============== ===============
7 ACTV, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements for the Nine Months Ended September 30, 1998 1(a) The consolidated financial statements are unaudited. In the opinion of management, these consolidated financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results for all periods. The financial results for the interim periods presented are not necessarily indicative of the results to be expected for either succeeding quarters or the full fiscal year. 1(b) Management of the Company believes that its current funds will enable the Company to finance its operations for at least the next twelve months. Such belief is based on assumptions that may not materialize, 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 may engage 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/A2 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 September 30, 1998 and December 31, 1997 reflect capitalized software production costs of $989,252 and $669,852, respectively, classified as a component of "Other" non-current assets. 3. 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 September 30, 1998 in kind rather than in cash. In connection with the purchase of such note, the Purchasers received on January 14, 1998 a warrant (the "Warrant") which allows the holder to purchase up to 17.5% of the fully-diluted shares of common stock of Texas Network or 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 8 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 holder of the Warrant has the right to put the Warrant to Texas Network for a value based on a multiple of its operating income. For accounting purposes, the Company has allocated approximately $1.4 million to the value of the Warrant based on a valuation by an investment banker. The Warrant is included outside of Consolidated Shareholders' Equity (Deficiency) due to its cash put feature and is being amortized as additional interest expense over the life of the Note. 4. During 1996, the Company raised approximately $9.1 million in net proceeds from the private placement of 5% exchangeable preferred stock (the "Exchangeable Preferred Stock") issued by its wholly owned subsidiary and convertible into shares of the Company. 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 if the closing price of the Company's Common Stock is above $9.00 for thirty consecutive trading days prior to redemption. The Exchangeable Preferred Stock is convertible into shares of common stock at a discounted conversion price. 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 $2,245,000 was recorded and included as minority interest for the nine months ended September 30, 1997. In November 1998, the holders of approximately 179,000 of the remaining approximately 184,000 shares of Exchangeable Preferred Stock surrendered all of their Exchangeable Preferred shares against receipt of a new ACTV, Inc. Series B 10% Convertible Preferred Stock (the "Series B Preferred") with a face value of $5,017,000 and shares of Common Stock. In addition, the holders received warrants to purchase approximately 1.94 million shares of Common Stock at $2.00 per share. Management believes that the total value received in Common Stock and Series B Preferred by the holders was approximately equal to, but no greater than, the fair value of the Exchangeable Preferred Shares surrendered by such holders on the date of the transaction. 9 The Series B Preferred is fully redeemable by the Company at any time at a 10% premium above face value plus accrued dividends. The holders of Series B Preferred are prohibited from converting any shares into Common Stock during the period from the present through November 13, 1999, whether or not the Company gives a notice of redemption during this period. Unlike the Exchangeable Preferred Stock, which is exchangeable at varying prices based on market conditions, the Series B Preferred shares are convertible at a fixed price, subject to a single adjustment. From November 13, 1999 to February 13, 2000, the Series B Preferred is convertible at a price of $2.00 per share. If the Series B Preferred is not redeemed by February 13, 2000, its conversion price will be adjusted to a fixed price of $1.33 per share for the remainder of its life. The Company has the right to redeem the warrants in full at a price of $.01 per warrant share in the event that the Company's Common Stock trades at or above an average of $4.50 per share during a period of 20 consecutive trading days. 5. The Company's balance sheets at September 30, 1998 and December 31, 1997 reflect a contra shareholders' equity (deficiency) amount of $1,070,872 and $199,900, respectively, related to (a) a loan made by the Company to an employee in August 1995 (September 30, 1998 and December 31, 1997 balance of $199,900) and (b) loans made to four employees in the first nine months of 1998 (September 30, 1998 balance of $870,972). All of the loans were non-interest bearing and 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 may 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 employee's service period, which is from the issuance of the loan to January 1, 1999. Such compensation expense recorded for the nine months ended September 30, 1998 was $1,474,581. 6. The consolidated balance sheet at September 30, 1998, reflects non-cash activity during the six month period ended September 30, 1998, that relates to the option exercises and resulting non-recourse loan transactions described in Note 5 above: an increase in notes receivable from stock sales of $870,972 (net of compensation expense of $1,474,581 and an increase in common stock and additional paid-in capital of a total of $2,345,553. The Company made no cash payments of interest or income taxes during the three and nine month periods ended September 30, 1997, or September 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 as explained in the following paragraphs. 10 The significant effects of the restatement are to present Convertible Preferred Stock of the Subsidiary as minority interest outside of Consolidated Shareholders' Equity (Deficiency), to record the dividends and accretion of this Preferred Stock as minority interest and to present the Warrant issued in January 1998 (see Note 4) outside of Consolidated Shareholders' Equity (Deficiency) due to its cash put feature. 11
Nine Months Ended September 30, - -------------------------------------------------------------------------------------------------------------------------- 1997 1998 ---------------------------------------- ---------------------------------------- As Previously As Previously Reported As Restated Reported As Restated ---------------- ---------------- ----------------- --------------- Minority Interest - Subsidiary Preferred stock dividends and Accretion $ - $2,245,435 $ - $ 379,161 ---------------- ---------------- ----------------- --------------- Net Loss $4,797,188 $7,042,623 $9,489,861 $9,869,022 ---------------- ---------------- ----------------- --------------- - ----------------------------------------------------------- Three Months Ended September 30, - -------------------------------------------------------------------------------------------------------------------------- 1997 1998 ---------------------------------------- ---------------------------------------- As Previously As Previously Reported As Restated Reported As Restated ---------------- ---------------- ----------------- --------------- Minority Interest - Subsidiary Preferred stock dividends and Accretion $ - $ 746,041 $ - $ 117,211 ---------------- ---------------- ----------------- --------------- Net Loss $1,557,557 $2,303,598 $3,716,273 $3,833,484 ---------------- ---------------- ----------------- --------------- September 30, - -------------------------------------------------------------------------------------------------------------------------- 1998 ---------------------------------------- As Previously Reported As Restated ---------------- ---------------- Convertible preferred stock of subsidiary $ - $3,742,314 ---------------- ---------------- Put Warrant $ - $1,371,624 ---------------- ---------------- Shareholders' equity (deficiency) $9,362,370 $4,248,432 ---------------- ---------------- The restatement had no effect on revenues, total assets and net loss per basic and diluted common share.
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTORY NOTE This amendment on Form 10-Q/A2 amends the Registrant's Quarterly Report on Form 10-Q/A filed by the Registrant on November 19, 1998 and is being filed to reflect the restatement of the Registrant's Consolidated Financial Statements (the "Restatement"). The Restatement reflects the presentation of Convertible Preferred Stock of Subsidiary as minority interest outside of Consolidated Shareholders' Equity (Deficiency), the recording of dividends and accretion of this Preferred Stock as minority interest and the presentation of the Warrant issued in January 1998 outside of Consolidated Shareholders' Equity (Deficiency). 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., including its two principal wholly-owned subsidiaries, ACTV Entertainment, Inc. and ACTV Net, Inc. ("the Company") has developed proprietary technologies for individualized television programming ("Individualized Programming" or "Individualized Television") and for the Internet. For television, the Company's products, in general, are tools for the creation of programming that allows viewer participation. For the Internet, the Company uses a proprietary software technology, called HyperTV, to create virtual communities around state-of-the-art educational and entertainment programming. The chief market presently targeted by the Company for its Individualized Programming is in-home entertainment, particularly sports programming, while the first market application of HyperTV is in education, with an emphasis on schools and universities in the United States. The Company's Individualized Programming for television 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"). HyperTV is a patented Java-based software technology that permits the simultaneous delivery of streamed video and Web URLs directly to users. (Java is a programming language developed for the Internet by Sun Microsystems.) HyperTV enables the practical convergence of video and Web technologies. For education applications, the Company has developed eSchool Online(TM), which uses HyperTV technology to create virtual learning communities that seamlessly integrate streamed 13 educational video, relevant Web content, and collaboration and assessment resources for students and educators. Since its inception, the Company has incurred operating losses approximating $60.9 million related directly to the development and marketing of the Individualized Programming and HyperTV. The Company is seeking to exploit the U.S. entertainment market on both a regional and national basis. The Company is launching regionally based, Individualized Television networks ("Regional Networks"), with programming 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. The Company's national Individualized Programming will initially be done through a joint venture formed in September 1998 with Liberty Media Corporation, called LMC IATV Events, LLC. ("LMC IATV"). LMC IATV, through an exclusive license from the Company, has the right to produce and distribute Individualized Programming consisting of major events. As consideration for granting such a license, the Company received a fixed one-third equity interest in the joint venture, with no obligations to make additional capital contributions. 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 venture now reaches more than 58 million homes nationwide. The Company plans 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 The Company believes that the differentiation afforded by the Company's Individualized Programming will allow distributors to offer their customers a unique programming service that will enhance their customer's acceptance of digital television. The Company plans to launch its first Regional Network in 1999 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. 14 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 September 1998, Liberty Media Corporation invested $5 million in Common Stock of the Company (the "Common Stock"), with an option to invest an additional $5 million. Simultaneous with this strategic investment, as noted above, the Company and Liberty Media Corporation created a joint venture, LMC IATV Events, LLC, to explore national applications of Individualized Programming for major events. In August 1997, General Instrument Corp. ("GI") invested $1 million in 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 1999. 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, additional network expansion, and planned activities of LMC IATV Events, LLC are part of the Company's plan to develop the entertainment division of its business. There can be no assurance that the Southwest Regional Network, other Regional Networks, if launched, or LMC IATV Events, LLC will generate significant revenues for the Company. The Company's target markets for HyperTV are K-12 classrooms, universities, distance learning programs, corporate training programs and consumer homes. 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. 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. 15 RESULTS OF OPERATIONS Comparison of Nine Month Periods Ended September 30, 1998 and September 30, 1997 During the nine month period ended September 30, 1998, the Company's revenues decreased 31% to $1,058,560, from $1,534,295 in the nine month period ended September 30, 1997. Nearly all of the Company's revenues in the more recent nine-month period were derived from Internet sales, compared to the comparable 1997 nine-month period, when the majority of revenues were related to television-based education hardware and content. Cost of sales in the nine months ended September 30, 1998, was $168,934, a decrease of 61% compared to cost of sales of $434,287 in the nine months ended September 30, 1997. The Company's gross margin increased to 84% in the more recent period, from 72% in the corresponding 1997 period. The increase was the result of the change in the composition of products sold during the nine months ended September 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, interest expense and minority interest - preferred stock dividends and accretion in the nine months ended September 30, 1998, increased 63%, to $9,766,665, from $6,000,435 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 nine months ended September 30, 1998, increased 440% to $810,984, from $150,210 for the nine months ended September 30, 1997. This increase was due principally to higher depreciation expenses related to the Southwest Regional Network's master control production facility and to the amortization of software development costs in the more recent period. Interest income in the nine months ended September 30, 1998, was $105,398, compared with $103,239 in the nine months ended September 30, 1997. The increase was due to higher average cash balances during the more recent period. The Company incurred interest expense and accretions of $718,220 in the nine months ended September 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 nine-month periods ending September 30, 1998 and September 30, 1997, the Company accrued $379,161 for dividends and $2,245,435 for dividends and accretions, respectively, related to its outstanding preferred stock, which was accounted for as minority interest.. For the nine months ended September 30, 1998, the Company's net loss was $9,869,022, or $.51 per basic and diluted share, an increase of 40% over the net loss of $7,042,623, or $.57 per basic and diluted share, incurred in the prior year's comparable period. The increase during the more recent nine-month period was the result of higher 16 overall expenses, led by higher stock appreciation rights and depreciation and amortization expenses, coupled with lower total revenues. Comparison of Nine Month Periods Ended September 30, 1997 and September 30, 1996 During the nine month period ended September 30, 1997, the Company's revenues increased 39% to $1,534,295 from $1,105,816 in the nine-month period ended September 30, 1996. All revenues in the nine-month period ended September 30, 1997 were derived from the education market, while in the 1996 nine-month period, the Company's revenues were 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, including the Company's first revenues from its new Internet software product. Cost of sales in the nine months ended September 30, 1997, decreased 10% to $434,287, compared with cost of sales of $480,321 in the nine months ended September 30, 1996. The Company's gross profit increased to 72% in the more recent period, from 57% in the corresponding 1996 period. The increase was due to a greater proportion of total revenues from higher margin products such as programs and software fees during the more recent period. In addition, the Company recorded no executive production fee revenues in the more recent period, unlike the 1996 period in which these lower margin services were a component of total revenues. Total expenses excluding cost of sales, interest expense and minority interest - preferred stock dividends and accretion in the nine months ended September 30, 1997, decreased 8% to $6,000,435, from $6,542,210 in the comparable period in 1996. The decrease was due to lower operating, amortization, and stock appreciation rights expenses, which more than offset moderately higher selling and administrative costs during the 1997 period. Depreciation and amortization expense for the nine months ended September 30, 1997, decreased 31% to $469,989, from $682,342 for the nine months ended September 30, 1996. This decrease was due to the recognition during the 1996 period of amortization expense for certain programming assets that were fully amortized during 1996. Interest income in the nine months ended September 30, 1997, increased 55% to $103,239, compared with $66,403 in the nine months ended September 30, 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either nine-month period. For the nine-month periods ending September 30, 1997 and September 30, 1996, the Company accrued $2,245,435 and $528,493, respectively, for dividends and accretions, related to its outstanding preferred stock, which was accounted for as minority interest.. The Company's net loss for the nine months ended September 30, 1997 increased 10% to $7,042,623, or $.57 per basic and diluted share, compared with the net loss of $6,378,805, or $.54 per basic and diluted share, incurred in the prior year's comparable period. The increase was the result principally of significantly higher dividends and accretions related to the Company's preferred stock in the more recent period, which more than 17 offset greater total revenues and higher gross profit during the nine months ended September 30, 1997. Comparison of Three Month Periods Ended September 30, 1998 and September 30, 1997 During the three month period ended September 30, 1998 ("Third Quarter 1998"), the Company's revenues increase approximately 58%, to $301,900, from $191,440 in the three month period ended September 30, 1997 ("Third Quarter 1997"). In the more recent quarter, all of the Company's revenues derived from Internet sales, while in Third Quarter 1997 the Company recorded revenues from both Internet sales and from television-based education hardware and content. Cost of sales in Third Quarter 1998 was $45,545, compared to Third Quarter 1997's cost of sales of $78,847. The Company's gross margin increased to 85% in the more recent quarter, from 59% in the corresponding 1997 quarter. The Company's Internet products have higher gross margins than those of television-based education hardware and content. Total expenses excluding cost of sales, interest expense and minority interest - preferred stock dividends and accretion increased approximately 124% in Third Quarter 1998, to $3,758,462, from $1,681,306 in Third Quarter 1997. The increase was due principally to higher operating, selling and administrative expenses and depreciation and amortization expense in the more recent period. 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 474% in Third Quarter 1998 to $296,721, from $51,722 in Third Quarter 1997. This increase was due principally to higher depreciation expenses related to the Southwest Regional Network's master control production facility and to the amortization of software development costs in the more recent period. Interest income in Third Quarter 1998 was $40,077, compared with $11,156 in Third Quarter 1997. The increase was due to higher average cash balances during the more recent period. The Company incurred interest expense and accretions of $254,243 in Third 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. For Third Quarter 1998 and Third Quarter 1997, respectively, the Company accrued $117,211 for dividends and $746,041 for dividends and accretions, respectively, related to its outstanding preferred stock, which was accounted for as minority interest... The Company's net loss in Third Quarter 1998 increased approximately 66%, to $3,833,484, or $.16 per basic and diluted share, from $2,303,598, or $.17 per basic and diluted share, in Third Quarter 1997, principally due to higher expenses associated with the Southwest Regional Network, as noted above. Comparison of Three Month Periods Ended September 30, 1997 and September 30, 1996 18 During the three month period ended September 30, 1997 ("Third Quarter 1997"), the Company's revenues decreased approximately 42%, to $191,440, from $332,220 in the three month period ended September 30, 1996 ("Third Quarter 1996"). In the more recent quarter, all of the Company's revenues derived from education sales, while in Third Quarter 1996 the Company recorded revenues from both education sales and from license and executive producer fees. The decline in sales resulted from the repositioning and upgrade of the Company's education product line from standalone classroom programs to Internet and other distance learning software and programming. Management expects the Company's new state-of-the-art software for individualizing Internet and television distance learning applications to provide higher revenues, along with increased gross margins. Cost of sales in Third Quarter 1997 decreased 52% to $78,847, compared to Third Quarter 1996's cost of sales of $165,711. The Company's gross margin increased to 59% in the more recent quarter, from 50% in the corresponding 1996 quarter. The gross margin increase was due principally to a greater percentage of higher margin education software sales in the revenue mix for the more recent quarter. Total expenses excluding cost of sales, interest expense and minority interest - preferred stock dividends and accretion decreased approximately 15% in Third Quarter 1997, to $1,681,306, from $1,974,335 in Third Quarter 1996. The decrease was due to lower operating and selling and administrative expenses, and a difference in stock appreciation rights expenses between the two periods. Depreciation and amortization expense in Third Quarter 1997 increased 10% to $158,315, from $143,920 in Third Quarter 1996. This increase was due to the retirement during the 1996 quarter of certain programming assets that were fully amortized. Interest income in Third Quarter 1997, increased 6% to $11,156, compared with $10,533 in Third Quarter 1996. The increase was due to higher average cash balances during the more recent period. The Company incurred no interest expense during either quarter. For the three month periods ending September 30, 1997 and September 30, 1996, the Company accrued $746,041 and $528,493, respectively, for dividends and accretions, related to its outstanding preferred stock, which was accounted for as minority interest... The Company's net loss in Third Quarter 1997 decreased slightly, to $2,303,598, or $.17 per basic and diluted share, from $2,325,786, or $.20 per basic diluted share, in Third Quarter 1996, principally the result of the noted difference in operating, selling and administrative, and stock appreciation rights expense, which more than offset the increase, in the more recent period, of a higher dividend and accretion expense related to the Company's outstanding convertible preferred stock. Liquidity and Capital Resources Since its inception, the Company (including its operating subsidiaries) has not generated revenues sufficient to fund its operations, and has incurred operating losses. Through September 30, 19 1998, the Company had an accumulated deficit of approximately $60.9 million. The Company's cash position on September 30, 1998 was $7,077,854, compared to $554,077 on December 31, 1997. During the nine month period ended September 30, 1998 the Company used $6,811,907 in cash for its operations, compared with $5,287,781 in the nine months ended September 30, 1997. With respect to investing activities, during the nine month period ended September 30, 1998 and 1997 the Company used cash of $1,468,475 and $1,936,430, respectively. Investing activities, in the more recent nine-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 nine month period ended September 30, 1998 from the proceeds of the $5.0 million principal value note financing, from private sales of Common Stock to an institutional investor, and from the private sale of Common Stock to Liberty Media Corporation. The Company met its cash needs in the nine month period ended September 30, 1997 from the remaining proceeds from the private sale of exchangeable preferred stock effected in August 1996. During Third Quarter 1998 the Company used $1,682,341 in cash for its operations, compared with $1,090,151 in Third Quarter 1997. With respect to investing activities, in Third Quarter 1998 and 1997 the Company used cash of $791,542 and $1,313,703, 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 September 30, 1998 and December 31, 1997 reflect expense accruals of $455,251 and $0, respectively, related to the Company's stock appreciation rights plan. 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. 20 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. Management of the Company believes that its current funds will enable the Company to finance its operations for at least the next twelve months. Such belief is based on assumptions that may not materialize, 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 may engage 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. 21 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. 22 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: February 10, 1999 /s/ William C. Samuels ----------------- ----------------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: February 10, 1999 /s/ Christopher C. Cline ----------------- ----------------------------- Christopher C. Cline Senior Vice President (principal financial and accounting officer) 23 EX-11 2 EXHIBIT 11 ACTV, INC. AND SUBSIDIARIES COMPUTATION OF LOSS PER SHARE
Nine Month Period Three Month Period Ended September 30, Ended September 30, 1997 1998 1997 1998 =============== =============== ================ ================ Weighted average shares outstanding.......... 12,338,339 19,309,832 13,171,584 23,422,018 Common stock equivalents -- -- -- -- =============== =============== ================ ================ Total............................... 12,338,339 19,309,832 13,171,584 23,422,018 =============== =============== ================ ================ Net loss..................................... $(7,042,623) $(9,869,022) $(2,303,598) $(3,833,484) =============== =============== ================ ================ Loss per share applicable to common Shareholders................................. $(.57) $(.51) $(.17) $(.16) =============== =============== ================ ================
24 EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 9-Mos 9-Mos DEC-31-1997 DEC-31-1998 SEP-30-1997 SEP-30-1998 2,014,980 7,077,854 0 0 588,497 578,841 0 0 346,672 176,548 3,219,785 8,501,409 2,856,433 3,793,297 859,819 1,393,016 9,025,950 15,615,619 3,888,903 1,952,668 0 4,300,581 0 0 8,620 7,260 1,437,493 2,621,000 (1,504,998) 1,620,172 9,025,950 15,615,619 1,534,295 1,058,560 1,534,295 1,058,560 434,287 168,934 6,000,435 9,766,665 2,245,435 379,161 0 0 (103,239) 612,822 (7,042,623) (9,869,022) 0 0 (7,042,623) (9,869,022) 0 0 0 0 0 0 (7,042,623) (9,869,022) (.57) (.51) (.57) (.51)
-----END PRIVACY-ENHANCED MESSAGE-----