UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q/A

Amendment No. 1

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

ACTV, Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-2907258
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

233 Park Avenue South
New York, New York		10003
(Address of principal executive offices)		(Zip Code)

(212) 497-7000
(Registrant’s telephone number, including area code)

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 ý No o

As of November 13, 2001, there were 55,880,028 shares of the registrant’s common stock outstanding.

The amendment No. 1 to Form 10Q is being filed to give effect to the restatement of the Company's consolidated financial statements as discussed in Note 13 to the consolidated financial statements.

Item 1. Financial Statements

ACTV, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(As Restated- See Note 13)

	September 30,			December 31,
	2001			2000
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	75,917,573		$	122,488,041
Accounts receivable-net	2,215,672			1,182,376
Other	6,944,901			3,758,935
Total current assets	85,078,146			127,429,352

Property and equipment-net	6,963,338			12,628,232

Other assets:
Restricted cash	4,196,827			3,165,368
Investment in warrant	16,255,355			76,016,175
Investments-other	8,348,887			3,250,000
Patents and patents pending	8,177,815			8,053,642
Software development costs	5,830,127			3,328,101
Goodwill	25,232,493			1,362,072
Other	1,365,553			275,638
Total other assets	69,407,057			95,450,996
Total assets	$	161,448,541		$	235,508,580

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	4,350,972		$	7,712,857
Deferred revenue	4,057,348			4,032,776
Total current liabilities	8,408,320			11,745,633

Deferred revenue	67,871,591			70,586,450
Minority interest	10,862,786			13,307,131

Stockholders’ equity:
Common stock, $0.10 par value, 200,000,000 shares authorized: issued and outstanding 55,864,480 at September 30, 2001 and 51,228,154 at December 31, 2000	5,586,448			5,122,816
Additional paid-in capital	311,527,843			297,073,713
Stockholder loans	(533,608		)	(643,606		)
Accumulated deficit	(242,274,839		)	(161,683,557		)
Total stockholders’ equity	74,305,844			139,869,366
Total liabilities and stockholders’ equity	$	161,448,541		$	235,508,580

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(As Restated- See Note 13)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2001			2000			2001			2000
Revenues	$	3,259,379		$	2,794,433		$	10,759,273		$	5,842,646

Costs and expenses:
Selling, general and administrative expenses	9,631,781			12,260,151			36,378,161			29,617,598
Stock-based compensation income	(8,580,695		)	(3,902,019		)	(11,399,850		)	(138,058,336		)
Depreciation and amortization	1,595,440			863,787			4,481,775			2,328,378
Amortization of goodwill	1,058,082			106,593			2,518,888			319,779
Restructuring charge	5,610,100			—			5,610,100			—
Total expenses/(income)	9,314,708			9,328,512			37,589,074			(105,792,581		)

(Loss)/income from operations	(6,055,329		)	(6,534,079		)	(26,829,801		)	111,635,227

Interest income	763,350			2,225,659			3,554,989			5,602,064
Interest expense	—			(13,407		)	—			(284,619		)
Interest-net	763,350			2,212,252			3,554,989			5,317,445

Other income/(expense)	(5,248,908		)	—			(1,028,623		)	—

(Loss)/income before minority interest, extraordinary item and cumulative effect of accounting change	(10,540,887		)	(4,321,827		)	(24,303,435		)	116,952,672

Minority interest	930,579			606,822			2,444,350			1,084,719

(Loss)/income before extraordinary item and cumulative effect of accounting change		(9,610,308	)		(3,715,005	)		(21,859,085	)		118,037,391

Extraordinary loss on early extinguishment of debt	—			—			—			(1,411,139		)
Cumulative transition effect of adopting SFAS No. 133	—			—			(58,732,197		)	—
Net (loss)/income	$	(9,610,308	)	$	(3,715,005	)	$	(80,591,282	)	$	116,626,252

Net (loss)/income per share:
Basic
(Loss)/income before extraordinary item and cumulative effect of accounting change	$	(0.17	)	$	(0.07	)	$	(0.40	)	$	2.40
Extraordinary item	—			—			—			(0.03		)
Cumulative transition effect of adopting SFAS No. 133	—			—			(1.07		)	—
Basic (loss)/income per share	$	(0.17	)	$	(0.07	)	$	(1.47	)	$	2.37

Diluted
(Loss)/income before extraordinary item and cumulative effect of accounting change	$	(0.17	)	$	(0.07	)	$	(0.40	)	$	1.91
Extraordinary item	—			—			—			(0.02		)
Cumulative transition effect of adopting SFAS No. 133	—			—			(1.07		)	—
Diluted net (loss)/income per share	$	(0.17	)	$	(0.07	)	$	(1.47	)	$	1.89

Shares used in basic calculations	55,851,828			50,743,722			54,721,804			49,274,794

Shares used in diluted calculations	55,851,828			50,743,722			54,721,804			61,739,619

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(As Restated- See Note 13)

	For the Nine Months Ended September 30,
	2001			2000
Cash flows from operating activities:
Net (loss)/income	$	(80,591,282	)	$	116,626,252
Adjustments to reconcile net (loss)/income to net cash used in operations:
Cumulative transition effect of adopting SFAS No. 133	58,732,197			—
Change in fair value of warrant	1,028,623			—
Depreciation and amortization	7,000,663			2,648,157
Deferred compensation — other	75,000			306,000
Stock-based compensation	(11,399,850		)	(138,058,336		)
Amortization of deferred revenue	(2,714,859		)	(904,954		)
Common stock issued in lieu of cash payment	1,767,275			3,040,000
Minority interest	(2,444,350		)	(1,084,719		)
Non-cash portion of restructuring charge	4,246,991			—

Changes in assets and liabilities:
Accounts receivable	73,111			(423,807		)
Other assets	(1,766,143		)	(5,539,109		)
Accounts payable and accrued expenses	(3,256,349		)	800,872
Deferred revenue	24,572			(515,231		)
Net cash used in operating activities	(29,224,401		)	(23,104,875		)
Cash flows from investing activities:
Investment in patents	(588,319		)	(411,622		)
Purchases of property and equipment	(7,610,143		)	(3,878,463		)
Investment in software development costs	(3,124,043		)	(700,436		)
Strategic investments	(5,217,350		)	(3,750,000		)
Net cash used in investing activities	(16,539,855		)	(8,740,521		)
Cash flows from financing activities:
Retirement of debt — net	—			(4,566,095		)
Transfer to restricted cash	(1,031,459		)	—
Net proceeds from subsidiary equity transactions	—			11,549,900
Net proceeds from equity financings	115,249			150,124,973
Repayment of stockholder loans	109,998			—
Net cash (used) provided by financing activities	(806,212		)	157,108,778

Net (decrease) increase in cash and cash equivalents	(46,570,468		)	125,263,382
Cash and cash equivalents, beginning of period	122,488,041			9,413,170
Cash and cash equivalents, end of period	$	75,917,573		$	134,676,552

Supplemental Disclosure to the Consolidated Statements of Cash Flows

	For the Nine
	Months Ended
	September 30,
	2001
Retirement of common stock	$	2,270,000
Purchase acquisitions:
Assets acquired (excluding cash)	1,948,392
Liabilities assumed	2,744,148
Market value of shares issued	27,475,090

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(As Restated- See Note 13)

	Common Stock
	Shares		Amount			Stockholder Loans			Additional Paid in Capital			Accumulated Deficit			Total
Balance at December 31, 2000	51,228,154		$	5,122,816		$	(643,606	)	$	297,073,713		$	(161,683,557	)	$	139,869,366
Issuance of shares in connection with exercise of stock options & warrants	1,309,046		130,904			—			734,343			—			865,247
Adjustment in deferred stock compensation	—		—			—			(11,399,850		)	—			(11,399,850		)
Issuance of common stock for 401(k) plan	92,960		9,296			—			237,979			—			247,275
Issuance of shares in connection with acquisition	4,007,889		400,789			—			27,074,301			—			27,475,090
Repayment of stockholder loans	—		—			109,998			—			—			109,998
Retirement of common stock	(773,569	)	(77,357		)	—			(2,192,643		)	—			(2,270,000		)
Net loss	—		—			—			—			(80,591,282		)	(80,591,282		)
Balance at September 30, 2001	55,864,480		$	5,586,448		$	(553,608	)	$	311,527,843		$	(242,274,839	)	$	74,305,844

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 20001

(As Restated- See Note 13)

1. Basis of Presentation

The results of operations for the three and nine months ended September 30, 2001 and 2000 are not necessarily indicative of a full year’s operations. In the opinion of management, the accompanying consolidated financial statements include all adjustments of a normal recurring nature that are necessary to present fairly such financial statements.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10–K/A for the year ended December 31, 2000.

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Certain reclassifications have been made to the prior years’ financial statements to conform to the 2001 presentation.

2. Financial Instruments

Effective January 1, 2001, ACTV adopted SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and 138. SFAS 133 requires that all derivative financial instruments be recorded in the balance sheet at fair value. The provisions of SFAS 133 affected the Company's accounting for its investment of 2.5 million restricted warrants for Liberty Livewire Corporation ("Livewire"). Prior to the adoption of SFAS 133, these warrants were carried at cost. With the adoption of SFAS 133, the Livewire investment is recorded at fair value. This resulted in the Company recording a cumulative effect transition adjustment loss of $58.7 million at January 1, 2001. Beginning in the first quarter of 2001, the Company records subsequent changes in the fair value of this investment in the statement of operations.

There may be periods with significant non-cash increases or decreases to the Company's net income/loss related to the changes in the fair value of the Livewire investment. The carrying value of the Company's derivative instrument approximates fair value. The fair value of the Livewire investment is determined by reference to underlying market values resulting from trading of Livewire on a national securities exchange and on estimates using the Black-Scholes valuation model.

3. Financing Activities

On March 27, 2000, Liberty Digital, Inc. invested an additional $20 million in the Company, increasing its investment to 16%, by exercising a warrant granted in March 1999.

On February 3, 2000, the Company completed a follow–on offering of 4.6 million common shares, including 0.6 million common shares to cover the over–allotments of our underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc., Lehman Brothers, and Salomon Smith Barney. The 4.6 million total common shares were priced to the public at $30 per share, for total gross proceeds of $138 million. We paid underwriting discounts and commissions of $1.80 per share or $8.28 million, resulting in net proceeds of $28.20 per share, or $129.4 million.

4. Merger and Acquisition Activity

Acquisition

On March 7, 2001, the Company acquired all of the assets and business of Intellocity, Inc., (“Intellocity”) a technology and engineering solutions provider focusing on the interactive television market. The Company acquired Intellocity for 4,007,890 shares of the Company’s common stock, aggregating $23.2 million, and issued options to purchase 762,665 shares of the Company’s common stock valued at $4.3 million, for an aggregate purchase price of $27.5 million. The Company could make an additional payment of up to 1.5 million shares and options contingent upon Intellocity’s achieving certain performance targets for the year ended December 31, 2001. Management of the Company believes that it is extremely unlikely that Intellocity, given its results for the nine months ended September 30, 2001, will achieve such performance targets. Intellocity shareholders are subject to provisions restricting the sale of the ACTV stock; these restrictions range over 4 years. The acquisition was accounted for under the purchase method of accounting in the first quarter of 2001.

The Company completed a review and determination of such fair values in the third quarter of 2001. The fair value of assets acquired and liabilities assumed amounted to approximately $0.8 million. Goodwill, representing the excess cost over the fair value of net assets acquired, was calculated to be $26.4 million and is being amortized over 7 years. (See Note 12)

The following table presents the combined results of operations on a pro forma basis had the acquisition of Intellocity been completed as of January 1, 2000. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results which would have been reported if the business combination had occurred on the date indicated or which may occur in the future. These pro forma amounts include estimates and assumptions that management believes are reasonable.

	For the Nine Months Ended September 30,
	2001			2000

Revenue	$	12,219,874		$	11,880,316

(Loss)/income before minority interest, extraordinary item and cumulative effect of accounting change	$	(25,151,139	)	$	115,126,008

(Loss)/income before extraordinary item and cumulative effect of accounting change	$	(22,706,789	)	$	116,350,985

Net (loss)/income	$	(81,438,986	)	$	114,939,846

Basic
(Loss)/income per share before extraordinary item and cumulative effect of accounting change	$	(0.41	)	$	2.10
Extraordinary item	—			(0.07		)
Cumulative effect of accounting change	(1.05		)	—
Basic (loss)/income per share	$	(1.46	)	$	2.03

Diluted
(Loss)/income per share before extraordinary item and cumulative effect of accounting change	$	(0.41	)	$	2.10
Extraordinary item	—			(0.07		)
Cumulative effect of accounting change	(1.05		)	—
Diluted (loss)/income per share	$	(1.46	)	$	2.03

On August 17, 2000, the Company acquired all of the outstanding capital stock of Bottle Rocket, Inc., a business engaged in the creation and marketing of online, games-based entertainment. The Company acquired Bottle Rocket in exchange for 272,035 shares of the Company’s common stock. The acquisition of Bottle Rocket has been accounted for under the pooling of interests method of accounting and, accordingly, the Company’s historical consolidated financial statements have been restated to include the accounts and results of operations of Bottle Rocket.

The following table sets forth the certain combined amounts of the previously reported separate results of the companies.

	For the Nine Months Ended September 30, 2000
	ACTV		Bottle Rocket			Combined
Revenues	$	4,040,129	$	1,802,517		$	5,842,646

Income/(loss) before minority interest, extraordinary item and cumulative effect of accounting change	118,498,820		(1,546,148		)	116,952,672

Income/(loss) before extraordinary item and cumulative effect of accounting change	119,583,539		(1,546,148		)	118,037,391

Net income/(loss)	$	118,172,400	$	(1,546,148	)	$	116,626,252

5. Minority Interest

For the three-month periods ended September 30, 2001 and 2000, we recorded a minority interest benefit of $0.9 million and $0.6 million, respectively. For the nine-month periods ended September 30, 2001 and 2000, we recorded a minority interest benefit of $2.4 million and $1.1 million, respectively. The minority interest benefit for both periods is principally the result of an apportionment of the loss of our Digital ADCO subsidiary, whose results are consolidated with ours, to outside minority owners of this subsidiary.

6. Segment Information (As Restated- See Note 13)

We have two principal business segments; Digital Television and Enhanced Media. Information concerning our business segments for the three and nine months ending September 30, 2001 and 2000 are as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2001			2000			2001			2000
Revenues
Digital Television	$	833,039		$	—		$	3,382,452		$	—
Enhanced Media	2,426,340			2,794,433			7,376,821			5,842,646
Total	$	3,259,379		$	2,794,433		$	10,759,273		$	5,842,646

Depreciation & Amortization
Digital Television	$	782,952		$	419,675		$	2,160,197		$	1,076,829
Enhanced Media	390,481			271,401			1,214,793			788,304
Unallocated Corporate	1,480,089			279,304			3,625,673			783,024
Total	$	2,653,522		$	970,380		$	7,000,663		$	2,648,157

Interest Income (Expense) — net
Digital Television	$	42,578		$	71,665		$	230,524		$	(170,138	)
Enhanced Media	1,440			(3,365		)	4,737			(1,936		)
Unallocated Corporate	719,332			2,143,952			3,319,727			5,489,519
Total	$	763,350		$	2,212,252		$	3,554,988		$	5,317,445

Net (Loss)/Income
Digital Television	$	(2,521,811	)	$	(1,908,412	)	$	(6,021,249	)	$	(6,909,436	)
Enhanced Media	(61,071,530		)	(3,025,312		)	(66,020,226		)	(8,409,037		)
Unallocated Corporate	53,983,033			1,218,719			(8,549,807		)	131,944,725
Total	$	(9,610,308	)	$	(3,715,005	)	$	(80,591,282	)	$	116,626,252

Capital Expenditures
Digital Television	$	778,426		$	1,380,096		$	2,980,897		$	2,677,566
Enhanced Media	217,337			380,115			1,166,649			1,495,715
Unallocated Corporate	1,674,956			623,843			7,174,959			817,240
Total	$	2,670,719		$	2,384,054		$	11,322,505		$	4,990,521

	September 30, 2001		December 31, 2000
Current Assets
Digital Television	$	5,059,132	$	10,290,068
Enhanced Media	3,957,604		2,382,673
Unallocated Corporate	76,061,410		114,756,611
Total	$	85,078,146	$	127,429,352

Total Assets
Digital Television	13,295,700		$	17,010,470
Enhanced Media	24,844,613		83,127,887
Unallocated Corporate	123,308,228		135,370,223
Total	$	161,448,541	$	235,508,580

7. Executive Compensation

For the nine-month periods ended September 30, 2001 and September 30, 2000, we incurred executive incentive compensation expense of $2.3 million and $4.6 million, respectively. For the three-month periods ending September 30, 2001 and September 30, 2000, this charge was $0 and $2.3 million respectively. This expense, which related to an executive incentive compensation provision that subsequently was cancelled, was based on changes in the market value of our common stock and paid in unregistered securities. The compensation recognized was contingent on continued employment of the executive and subject to forfeiture.

8. Investment in Warrant

The Company and Liberty Livewire LLC, a unit of Liberty Livewire Corporation (“Livewire”) in April 2000 entered into a joint marketing venture, “HyperTV with Livewire.” HyperTV with Livewire received various rights to use certain patented ACTV technologies in providing turnkey convergence services, including application hosting, web authoring services, data management, e-commerce and other value–added services for advertisers, television programmers, studios and networks.

In connection with entering into the joint marketing agreement, the Company received a warrant to acquire 2,500,000 shares of Livewire common stock at an exercise price of $30 per share. The warrant, which expires in June 2015 and includes registration rights, vests ratably over five years, beginning April 13, 2001. With certain exceptions, the warrant is not transferable. The Company previously recorded an investment and deferred revenue in the amount of approximately $76.0 million, the estimated fair value of the warrant (using the Black–Scholes pricing model) at the time the agreement was executed. Using similar methodology, the estimated value of the warrant at September 30, 2001 was $16.3 million. The investment is now accounted for under SFAS No. 133, (See Note 2.) The deferred revenue recorded by the Company is being amortized into revenue over a period of 21 years, the contractual term of the joint marketing venture.

9. Corporate Restructuring

During the third quarter 2001, the Company completed certain restructuring initiatives, which contributed to a 21% reduction in selling, general and administrative expenses for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000. The restructuring charge totaled $5.6 million and related to the surrender of real estate leases and employee severance expenses. The restructuring charge includes a non-cash expense totaling $4.2 million, which is the net effect of the write-off of property and equipment for abandoned leased office space and the reversal of the straight-line rent recorded for the leased office space. Also included is approximately $1.5 million for employee severance expenses, of which $1.3 million was paid in cash during the nine-month period ended September 30, 2001.

10. Supplemental Disclosure of Non-Cash Activities

For each of the nine-months ended September 30, 2001 and 2000 we recorded deferred expense of $1.5 million and $3.0 million, respectively, relating to the unamortized portion of the executive incentive compensation paid in common stock.

The Company recorded a reduction in non-cash stock-based compensation expense in connection with vested variable stock options of $11.4 million and $138.1 million, respectively for the nine months ended September 30, 2001 and 2000.

We also recorded revenue of $2.7 million and $0.9 million during the nine-month periods ended September 30, 2001 and 2000, respectively, relating to amortization of the deferred revenue recorded in connection with the Liberty Livewire warrant (See Note 8).

11. Net (Loss)/Income Per Share

The following table sets forth the computation of basic and diluted (loss)/income per share.

	Three months ended						Nine months ended
	September 30, 2001			September 30, 2000			September 30, 2001			September 30, 2000

Numerator:
(Loss)/income before extraordinary item and cumulative effect of accounting change	$	(9,610,308	)	$	(3,715,005	)	$	(21,858,085	)	$	118,037,391
Extraordinary loss on early extinguishment of debt		—			—			—			(1,411,139	)
Cumulative transition effect of adopting SFAS No. 133		—			—			(58,732,197	)		—
Net (loss) income	$	(9,610,308	)	$	(3,715,005	)	$	(80,591,282	)	$	116,626,252

Denominator
Basic weighted-average shares outstanding	55,851,828			50,743,722			54,721,804			49,274,794
Weighted-average options outstanding	—			—			—			12,464,825
Diluted weighted average shares outstanding	55,851,828			50,743,722			54,721,804			61,739,619

(Loss)/income per share
Basic
Before extraordinary item and cumulative effect of accounting change	$	(0.17	)	$	(0.07	)	$	(0.40	)	$	2.40
Extraordinary item		—			—			—			(0.03	)
Cumulative transition effect of adopting SFAS No. 133	—			—			(1.07		)	—
Basic net (loss)/income per share	$	(0.17	)	$	(0.07	)	$	(1.47	)	$	2.37

Diluted
Before extraordinary item and cumulative effect of accounting change	$	(0.17	)	$	(0.07	)	$	(0.40	)	$	1.91
Extraordinary item		—			—			—			(0.02	)
Cumulative transition effect of adopting SFAS No. 133	—			—			(1.07		)	—
Diluted net (loss) income per share	$	(0.17	)	$	(0.07	)	$	(1.47	)	$	1.89

12. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets”. These pronouncements significantly change the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS No. 142 states goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. Goodwill is currently being amortized at approximately $4.2 million annually. The Company has not yet completed its analysis of the new pronouncements and has not yet determined what effects the new pronouncements will have on its financial statements.

13. Restatement

Subsequent to the issuance of the Company's 2000 consolidated financial statements, the Company determined that stock options granted to certain employees should be accounted for as variable plan stock options. Accordingly, the Company has restated its financial statements to reflect the application of variable stock option accounting to the affected stock option awards. The changes resulted in the recording of additional stock-based compensation of $8.6 million and $3.9 million for the three months ended September 30, 2001 and September 30, 2000, respectively. The changes resulted in a credit of $11.4 million and $138 million of stock-based compensation expense for the nine month periods ended September 30, 2001 and September 30, 2000, respectively.

In addition, subsequent to the issuance of the Company's 2001 third quarter 10-Q, the Company determined that the investment in Livewire qualifed as a derivative under SFAS No. 133. Accordingly, the Company has restated its financial statements to reflect the adoption of SFAS No. 133 to the Livewire investmtent. The adoption resulted in the recording of a cumulative transition adjustment of $58.7 million in the first quarter of 2001 and additional expense of $5.2 million related to the change in fair value of the underlying investment for the three month period ended September 30, 2001.

A summary of the significant effects of the restatement is as follows:

	As of September 30, 2001
	As Previously Reported			As Restated

Other currrent assets	$	7,478,509		$	6,944,901
Stockholder loan	—			(533,608		)
Additional paid-in-capital	299,459,553			311,527,843
Accumulated deficit	(230,206,549		)	(242,274,839		)

For the Three Months Ended September 30,

2001

2000

As Previously Reported

As Restated

As Previously Reported

As Restated

Stock-based compensation (income)/expense

—

(8,580,695

)

—

(3,902,019

)

Loss on investment in warrant

(59,760,820

)

—

Loss from operations

(74,396,844

)

(6,055,329

)

(10,436,098

)

(6,534,079

)

Other income/(expense)

—

(5,248,908

)

—

Loss before extraordinary item and cumulative effect of accounting change

(72,702,915

)

(9,610,308

)

(7,617,024

)

(3,715,005

)

Net loss

(72,702,915

)

(9,610,308

)

(7,617,024

)

(3,715,005

)

Basic and diluted net loss per share

(1.30

)

(0.17

)

(0.15

)

(0.07

)

For the Nine Months Ended September 30,

2001

2000

As Previously Reported

As Restated

As Previously Reported

As Restated

Stock-based compensation expense (income)

—

(11,399,850

)

—

(138,058,336

)

Loss on investment in warrant

(59,760,820

)

—

(Loss)/income from operations

(97,990,470

)

(26,829,801

)

(26,423,109

)

111,635,227

Other income/(expense)

—

(1,028,623

)

—

(Loss)/income before extraordinary item and cumulative effect of accounting change

(91,991,132

)

(21,859,085

)

(20,020,945

)

118,037,391

Cumulative transition effect of adopting
SFAS No. 133

—

(58,732,197

)

—

Net (loss)/income

(91,991,132

)

(80,591,282

)

(21,432,084

)

116,626,252

(Loss)/income per common share:

Basic

Before extraordinary item and cumulative effect of accounting change

(1.68

)

(0.40

)

(0.41

)

2.40

Extraordinary item

—

(0.02

)

(0.03

)

Cumulative transition effect of adopting
SFAS No. 133

—

(1.07

)

—

Basic net (loss)/income per share

(1.68

)

(1.47

)

(0.43

)

2.37

Diluted

Before extraordinary item and cumulative effect of accounting change

(1.68

)

(0.40

)

(0.41

)

1.91

Extraordinary item

—

(0.02

)

(0.02

)

Cumulative transition effect of adopting
SFAS No. 133

—

(1.07

)

—

Diluted net (loss)/income per share

(1.68

)

(1.47

)

(0.43

)

1.89

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

You should read the following discussion together with our consolidated financial statements and related notes included elsewhere. The results discussed below are not necessarily indicative of the results to be expected in any future periods. To the extent that the information presented in this discussion addresses financial projections, information or expectations about our 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. See “Special Note Regarding Forward–Looking Statements” for further information about forward–looking statements. Management’s Discussion and Analysis of Finanicial Condition and Results of Operations presented gives effect to the restatement of our previously reported results of operations for these periods. See Note 13 to the consolidated financial statements for a discussion of this matter.

We are a digital media company that provides technical services, tools and proprietary applications for digital television and enhanced media. We have two operating business segments, which we call Digital TV and Enhanced Media.

ACTV’s Digital TV segment provides applications and technical services to television distributors, advertisers, programmers and digital TV infrastructure companies, as they move from analog to digital systems. In addition, our Digital TV technologies enable television programmers and advertisers to create individualized programming for digital television transmission systems. We believe that these technologies are unique in providing targeting, interactivity and accountability for television commercials, and in giving viewers the ability to customize their viewing experiences for a wide variety of programming applications. Our Enhanced Media technologies allow both for the enhancement of video and audio content, including standard TV programming, with Web-based information, interactivity and games. For the Enhanced Media market, we provide technology and services for synchronizing the delivery of television programming and Internet content.

Comparison of Three-Month Periods Ended September 30, 2001 and September 30, 2000

Revenues. During the three-month period ended September 30, 2001, our revenues increased 18%, to $3.3 million, compared with $2.8 million in the three-month period ended September 30, 2000. In the more recent period, Enhanced Media licensing and services accounted for approximately 74% of our revenue, with Digital TV professional and technical services providing the remaining 26%. In last year’s three-month period, all of our revenues were derived from Enhanced Media licensing and services.

Total Selling, General and Administrative Expenses. Total selling, general and administrative expenses decreased approximately 22% in the third quarter of 2001, to $9.6 million, from $12.3 million in the third quarter of 2000.

Stock-Based Compensation. Stock-based compensation expense was credited $8.6 million for the three months ended September 30, 2001, as compared to a credit of stock-based compensation expense of $3.9 million for the three months ended September 30, 2000. The Company records a charge or credit to compensation expense based on increases or decreases in the market value of the Company's common stock in excess of the exercise price of certain employee options, which are subject to variable option accounting treatment.

Restructuring Charge. During the third quarter 2001, we recorded an expense of $5.6 million, the majority of which was non-cash, related to restructuring initiatives. This expense includes charges for the surrender of real estate leases and employee severance costs. During the fourth quarter of 2001 and pursuant to the surrender of certain New York City leases, the Company will benefit in unrestricted cash and cash equivalents by approximately $9.3 million resulting from payments made by third parties and a release of restricted cash used to guarantee leases.

Depreciation and Amortization. Depreciation and amortization expense increased 170%, to $2.7 million in the three months ended September 30, 2001, versus $1.0 million during the same period in 2000. The increase was the result of the depreciation of a larger fixed asset base, including leasehold improvements and equipment related to the deployment of SpotOn, and higher amortization expense for capitalized software development and for goodwill. In March 2001, we recorded additional goodwill in connection with our purchase of Intellocity.

Interest — Net. Interest income in third quarter of 2001 was $0.8 million, compared with $2.2 million in the third quarter of 2000. The decrease was the result of lower average cash balances during the more recent quarter and lower prevailing interest rates on short-term investments.

Other Income/(Expense). Other income(expense) is the change in fair value of the investment in warrant which is now accounted for as a derivative after adoption of SFAS No. 133 and the application of its requirements. For the three months ended September 30, 2001, the Company recorded a decrease in the value of the warrant of $5.2 million.

Cumulative Transition Effect of Change in Accounting Principle. Effective January 1, 2001, ACTV adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and 138. SFAS 133 requires that all derivative financial instruments be recorded in the balance sheet at fair value. The provisions of SFAS 133 affected the Company's accounting for its investment of 2.5 million restricted warrants for Liberty Livewire Corporation ("Livewire"). Prior to the adoption of SFAS 133, these warrants were carried at cost. With the adoption of SFAS 133, the Livewire investment is recorded at fair value. This resulted in the Company recording a cumulative effect transition adjustment loss of $58.7 million at January 1, 2001. There may be periods with significant non-cash increases or decreases to the Company's net income/loss as a result of the changes in the fair value of the Livewire investment.

Net Loss. For the three months ended September 30, 2001, our net loss was $9.6 million, or $0.17 per basic and diluted share, compared to the net loss of $3.7 million, or $0.07 per basic and diluted share, for the three months ended September 30, 2000. The increase was the result of the significant warrant impairment and restructuring charges incurred during the more recent period, which were significantly greater than the effects of an increase in revenues along with a reduction in selling, general and administrative expenses for the three-month period ended September 30, 2001.

Comparison of Nine-Month Periods Ended September 30, 2001 and September 30, 2000

Revenues. During the nine-month period ended September 30, 2001, our revenues increased 86%, to $10.8 million, compared with $5.8 million in the nine-month period ended September 30, 2000. In the more recent period, Enhanced Media licensing and services accounted for 69% of our revenue, with Digital TV professional and technical services providing the remaining 31%. In last year’s nine-month period, all of our revenues were derived from Enhanced Media licensing and services.

Total Selling, and General and Administrative Expenses. Total selling, general and administrative expenses increased approximately 23% in the first nine months of 2001, to $36.4 million, from $29.6 million in the first nine months of 2000.

Stock-Based Compensation. Stock-based compensation expense was credited $11.4 million for the nine months ended September 30, 2001, compared to a credit of compensation expense of $138.0 million for the nine months ended September 30, 2000. The Company records a charge or credit to compensation expense based on increases or decreases in the market value of the Company's common stock in excess of the exercise price of certain employee options, which are subject to variable option accounting treatment.

Restructuring Charge. For the nine-month period ended September 30, 2001, we recorded an expense of $5.6 million, the majority of which was non-cash, related to restructuring initiatives. This expense includes charges for the surrender of real estate leases and employee severance costs. During the fourth quarter of 2001 and pursuant to the surrender of certain New York City leases, the Company will benefit in unrestricted cash and cash equivalents by approximately $9.3 million resulting from payments made by third parties and a release of restricted cash used to guarantee leases.

Depreciation and Amortization. Depreciation and amortization expense increased 169%, to $7.0 million in the nine-month period ended September 30, 2001, from $2.6 million in the nine-month period ended September 30, 2000. The increase was the result of depreciation of a larger fixed asset base, including leasehold improvements and equipment related to the deployment of SpotOn, and higher amortization expense for capitalized software development and for goodwill. Beginning in March 2001, we recorded additional goodwill in connection with our purchase of Intellocity, Inc.

Interest — Net. Interest income in nine months of 2001 was $3.6 million, compared with $5.6 million in the first nine months of 2000. The decrease was the result of lower average cash balances during the nine months ended September 30, 2001 and lower prevailing interest rates on short-term investments. We incurred no interest expense in the first nine months of 2001, compared to interest expense of $0.3 million in the first nine months of 2000. The interest expense for the first nine months of 2000 relates to a $5 million original face value note issued in January 1998 by a subsidiary of ours; the note was redeemed in April 2000.

Other Income/(Expense). Other income(expense) is the change in fair value of the investment in warrant which is now accounted for as a derivative after adoption of SFAS 133 and the application of its requirements. For the nine months ended September 20, 2001, the Company recorded a decrease in the fair value of the warrant of $1.0 million.

Net (Income)/Loss Before Extraordinary Item. For the nine months ended September 30, 2001, our net loss before extraordinary item was $21.9 million, $0.40 per basic and diluted share, compared to the net income before extraordinary item of $118.0 million, or $2.40 per basic share and $1.91 per diluted share, for the nine months ended September 30, 2000. The increase was the result of the warrant impairment and restructuring charges incurred during the more recent period, along with higher expenses in all other categories, which more than offset higher revenues in the nine months ended September 30, 2001.

Cumulative Transition Effect of Change in Accounting Principle. Effective January 1, 2001, ACTV adopted SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS 137 and 138. SFAS 133 requires that all derivative financial instruments be recorded in the balance sheet at fair value. The provisions of SFAS 133 affected the Company's accounting for its investment of 2.5 million restricted warrants for Liberty Livewire Corporation ("Livewire"). Prior to the adoption of SFAS 133, these warrants were carried at cost. With the adoption of SFAS 133, the Livewire investment is recorded at fair value. This resulted in the Company recording a cumulative effect transition adjustment loss of $58.7 million at January 1, 2001. There may be periods with significant non-cash increases or decreases to the Company's net income/loss pertaining to the Livewire investment.

Net(Income)/ Loss. For the nine months ended September 30, 2001, our net loss after extraordinary loss was $80.6 million, or $1.47 per basic and diluted share, compared to the net income of $116.6 million, or $2.37 per basic share and $1.89 per diluted share, for the nine months ended September 30, 2000. The extraordinary loss was the result of early retirement of long-term debt on April 3, 2000. The extraordinary loss includes a prepayment premium of $0.4 million and the unamortized original issue discount and deferred issuance costs of $0.8 million and $0.2 million, respectively, for a total loss of $1.4 million, or $0.03 per share.

Liquidity and Capital Resources

Since our inception, we (including our operating subsidiaries) have not generated revenues sufficient to fund our operations, and have incurred operating losses. Through September 30, 2001, we had an accumulated deficit of approximately $242.2 million. Our cash position on September 30, 2001 was $75.9 million, compared to $122.5 million on December 31, 2000.

Net Cash Used In Operating Activities. During the nine months ended September 30, 2001, we used $29.2 million in cash for operations, compared with $23.1 million for the nine months ended September 30, 2000. The increase in net cash used by operating activities in the nine-month period ended September 30, 2001, as compared to the same period the previous year, was principally due to a higher net loss during the more recent period.

Net Cash Used In Investing Activities and Capital Expenditures. With regard to investing activities, in the nine months ended September 30, 2001, we used cash of $16.5 million, compared to $8.7 million in the nine months ended September 30, 2000. The increase in the more recent period is due to greater investments in equipment and leasehold improvements, software development and strategic equity investments.

Net Cash (Used In) Provided By Financing Activities. With regard to financing activities, in the nine months ended September 30, 2001, we used cash of $1.0 million, compared to $157.1 million provided by financing activities in the nine months ended September 30, 2000. The cash used in the more recent period was related to the

assignation of $1.1 million for the guarantee of letters of credit required under a facilities lease. Cash provided by financing activities of $161.6 million in the nine months ended September 30, 2000 related to a public follow-on offering completed in February 2000, the exercise of a warrant in March 2000, and a partial payment for the sale of shares in our Digital ADCO subsidiary. We used cash of $4.6 million in the nine months ended September 30, 2000 for the retirement of debt.

During the fourth quarter of 2001 and pursuant to the surrender of certain New York City leases, the Company will benefit in unrestricted cash and cash equivalents by approximately $9.3 million resulting from payments made by third parties and a release of restricted cash used to guarantee leases.

We met our cash needs in the nine-month periods of both 2001 and 2000 primarily from the net proceeds of a public, follow-on offering completed in February 2000. Through a group of underwriters we sold total of 4.6 million common shares, resulting in net proceeds of $129.4 million. In addition, Liberty Digital, Inc. in March 2000 invested an additional $20 million in us by exercising a warrant granted in March 1999.

In August 2000, OpenTV invested $10 million in our Digital ADCO subsidiary and in late 2000 Motorola Broadband made a final payment of $1.5 million, pursuant to its share purchase obligation of $5 million upon the formation of Digital ADCO.

Impact of Inflation

Inflation has not had any significant effect on the Company’s operating costs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's interest income is affected by changes in the general level of U.S. interest rates. Changes in U.S. interest rates could affect the interest earned on the Company's cash equivalents and investments. Currently, changes in U.S. interest rates would not have a material effect on the interest earned on the Company's cash equivalents and investments. A majority of these cash equivalents and investments earn a fixed rate of interest while the remaining portion earns interest at a variable rate. The Company does not anticipate that exposure to interest rate market risk will have a material impact on the Company due to the nature of the Company's investments.

During April 2000, the Company received a warrant to acquire 2,500,000 shares of Liberty Livewire Corporation ("Livewire"), a publicly traded company. The warrant becomes exercisable at the rate of 500,000 shares per year, commencing on April 13, 2001, includes certain registration rights and may be exercised until March 31, 2015. The warrant is not transferable, except in certain circumstances. The Company estimated the value of the warrant to be $76,016,175 at the date it was received, using the Black-Scholes pricing model, with a risk free rate of 6.5%, a volatility of 80% and assuming no cash dividends. The estimated fair value of the warrant at September 30, 2001 was approximately $16.3 million, using similar assumptions. The Company expects the fair value of the warrant to fluctuate based on the underlying stock price of Livewire. As of January 1, 2001 any change in fair value in the investment in warrant is recorded to the statement of operations as the Company adopted SFAS No. 133. The Company does not currently expect to exercise or register shares in the coming year.

The Company records stock-based compensation expense based on increases and decreases in the market price of the Company's common stock above the exercise price of certain employee options, which are subject to variable option accounting treatment. To the extent that the Company has a stock-based compensation obligation at the beginning of a given reporting period, the Company will recognize a reduction in stock-based compensation expense related to unexercised variable options for that period based on a reduction of the market price for the Company's stock at the end of the period. The obligation will increase as the market price for the Company's common stock increases at the end of a reporting period.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

ACTV, Inc. and its wholly-owned subsidiary HyperTV Networks, Inc. are co-plaintiffs in a civil action filed against The Walt Disney Co., ABC, Inc. and ESPN, Inc. in December, 2000, which action alleges that the defendants' "Enhanced TV" system synchronizing a web site application to, amongst others, EPSN Sunday Night and ABC Monday Night Football telecasts has infringed and is continuing to infringe certain of the plaintiffs' patents. That action is continuing in the U.S. District Court, Southern District of New York.

Item 2. Changes in Securities

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Stockholders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8–K

	(a)	Exhibits
		None

	(b)	Reports on Form 8–K: None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			ACTV, Inc.

			Registrant


Date: April 10, 2002			/s/ David Reese
			David Reese
			Chairman, Chief Executive Officer and Director


Date: April 10, 2002			/s/ Christopher C. Cline
			Christopher C. Cline
			Chief Financial Officer
			(Principal Financial and Accounting Officer)