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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
ACTV, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2907258
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Avenue of the Americas
New York, New York 10020
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(Address of principal executive offices) (Zip Code)
(212) 262-2570 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (g) 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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of August 13, 1996, there were 11,892,105 shares of the registrant's common
stock outstanding.
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ACTV, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets at December 31, 1995 and
June 30, 1996 (unaudited) ................................................2
Consolidated Statements of Operations for the six and
three month periods ended June 30, 1995 and 1996 (unaudited)..............3
Consolidated Statements of Cash Flows for the six and
three month periods ended June 30, 1995 and 1996 (unaudited)..............4
Notes to Consolidated Financial Statements................................5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................6--11
PART II OTHER INFORMATION....................................................12
Exhibit 11...........................................................13
Signatures
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1995 1996
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............... $3,531,782 $1,189,507
Accounts receivable ..................... 349,291 467,925
Education equipment inventory ........... 112,218 220,993
Other ................................... 61,011 264,626
---------- ----------
Total current assets ................ 4,054,302 2,143,051
---------- ----------
Property and equipment-net .............. 416,895 659,918
---------- ----------
Other Assets:
Video program inventory-net ............. 214,824 --
Patents and patents pending-net ......... 268,980 261,379
Goodwill-net ............................ 3,493,932 3,280,746
Other ................................... 102,195 331,106
---------- ----------
Total other assets .................. 4,079,931 3,873,231
---------- ----------
Total .......................... $8,551,128 $6,676,200
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses... $1,090,392 $1,196,368
Deferred stock appreciation rights...... 566,883 621,466
---------- ----------
Total current liabilities........... 1,657,275 1,817,834
---------- ----------
Total liabilities................... 1,657,275 1,817,834
Shareholders' equity:
Preferred stock, $.10 par value,
1,000,000 shares authorized, none
issued.................................. -- --
Common stock, $.10 par value, 35,000,000
shares authorized: issued and
outstanding 11,396,419 at
December 31, 1995, 11,892,105 at
June 30, 1996........................ 1,139,642 1,189,211
Additional paid-in capital............... 36,686,742 38,654,705
Notes receivable from stock sales........ (567,500) (567,500)
---------- ----------
Total................................ 37,258,884 39,276,416
Accumulated deficit...................... (30,365,031) (34,418,050)
---------- ----------
Total shareholders' equity........... 6,893,853 4,858,366
---------- ----------
Total........................... $8,551,128 $6,676,200
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS THREE MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues.................... $753,889 $763,515 $412,255 $419,993
License fees from related party... -- 10,081 -- 2,929
---------- ---------- ---------- ----------
Total revenues................. 753,889 773,596 412,255 422,922
Cost of Sales..................... 212,337 314,610 125,236 106,600
---------- ---------- ---------- ----------
Gross profit................... 541,552 458,986 287,019 316,322
Expenses:
Operating expenses................ 529,038 1,005,988 312,895 487,886
Selling and administrative........ 2,465,048 2,968,882 1,329,625 1,438,263
Depreciation and amortization..... 311,616 325,236 202,937 137,357
Amortization of goodwill.......... 213,186 213,186 106,593 106,593
Stock appreciation rights......... 448,355 54,583 (275,810) (339,008)
---------- ---------- ---------- ----------
Total expense.................. 3,967,243 4,567,875 1,676,240 1,831,091
Interest (income).................... (56,470) (55,870) (26,691) (22,633)
Interest expense - related parties... 73,595 -- 33,333 --
---------- ---------- ---------- ----------
Interest expense - net............ 17,125 (55,870) 6,642 (22,633)
---------- ---------- ---------- ----------
Net loss before extraordinary
gain................................. 3,442,816 4,053,019 1,395,863 1,492,136
Gain on extinguishment of debt
obligations.......................... 94,117 -- -- --
---------- ---------- ---------- ----------
Net loss............................. $3,348,699 $4,053,019 $1,395,863 $1,492,136
========== ========== ========== ==========
Loss per share before extraordinary
gain................................. $.36 $.35 $.15 $.13
Loss per share after extraordinary
gain................................. $.35 $.35 $.15 $.13
========== ========== ========== ==========
Weighted average number of common
shares outstanding.................. 9,452,332 11,684,987 9,493,367 11,891,160
</TABLE>
See Notes to Consolidated Financial Statements
3
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS THREE MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $3,348,699 $4,053,019 $1,395,863 $1,492,136
---------- ---------- ---------- ----------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization............. 525,035 538,422 309,530 243,950
Stock appreciation rights................. 287,106 54,583 (275,810) (339,008)
Gain on extinguishment of debt
obligations............................... (94,717) -- -- --
Common stock issued for services.......... 147,930 114,047 -- 14,281
Changes in operating assets and liabilities:
Accounts receivable....................... (272,858) (118,634) (206,757) (163,517)
Other assets.............................. 6,866 (211,163) 19,045 (132,288)
Accounts payable and accrued expenses..... 142,354 105,976 535,609 (121,332)
Education equipment inventory............. 1,669 (108,775) (30,016) (78,258)
Interest payable.......................... 73,332 -- 33,333 --
---------- ---------- ---------- ----------
Net cash (used) in operating
activities....................... (2,531,982) (3,678,563) (1,010,929) (2,068,308)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock........ 3,290,875 1,903,485 1,784,500 --
Proceeds from exercise of options......... 68,600 -- 60,300 --
Discounted prepayment of note............. (101,458) -- -- --
Repayment of note......................... (525,250) -- (500,000) --
---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. 2,732,767 1,903,485 1,344,800 --
Cash flows from investing activities:
Investment in property and equipment...... 462,744 567,197 424,442 398,164
---------- ---------- ---------- ----------
Net cash used in investing
activities....................... 462,744 567,197 424,442 398,164
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.................................... (261,959) (2,342,275) (90,571) (2,466,472)
Cash and cash equivalents,
beginning of period....................... 2,479,840 3,531,782 2,308,452 3,655,979
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period............................. 2,217,881 1,189,507 2,217,881 1,189,507
========== ========== ========== ==========
</TABLE>
Supplemental disclosure of noncash investing activity: the consolidated balance
sheet at June 30, 1995, reflects an increase of other assets -- net of $198,825
(net of accumulated amortization of $66,275) and a corresponding increase in
accounts payable of $265,100.
4
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ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
1(a). The consolidated financial statements are unaudited, except as indicated.
In the opinion of management, these consolidated financial statements reflect
all normal, recurring adjustments necessary for a fair presentation of the
results for all periods. The financial results for the interim periods presented
are not necessarily indicative of the results to be expected for either
succeeding quarters or the full fiscal year.
1(b) In August 1996, the Company raised $10 million (before expenses and
commissions related to the fund raising) from the issuance by two wholly-owned
subsidiaries of the Company, ACTV Holdings, Inc. and ACTV Financing, Inc., of
convertible preferred shares to private investors. Pursuant to this transaction,
the subsidiaries issued preferred shares that are convertible into common shares
of ACTV, Inc. beginning January 1, 1997. The conversion price of the preferred
shares is at a discount to the market price for the ACTV, Inc. common shares at
the time of conversion. The percentage discount increases as the length of the
holding period prior to conversion increases, from a base of 14% for conversion
in January 1997 to a maximum of 30.375% for conversion in September 1997 or
thereafter. The $10 million financing consists of $4 million in immediately
available funds, with the remaining $6 million paid into an escrow account. The
escrow funds are to become available to the Company contingent upon the
satisfaction of certain conditions in the contracts with the holders of the
preferred stock.
The Company believes that it has sufficient resources to fund its operations for
the next twelve months, whether or not it receives the $6 million in escrowed
funds. However, if the Company does not receive these funds and does not obtain
additional financing, it may be required to reduce certain planned expenditures
in certain of the markets it is attempting to develop. If management's
assumptions regarding future events prove incorrect, the Company may be unable
to fund its operations, even at a reduced level, for the next twelve months.
2. For a summary of significant accounting policies and additional financial
information, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
3. The consolidated statements of operations for the six month period ended June
30, 1995, reflect an extraordinary gain of $94,117 on the extinguishment of an
obligation to Nolan Bushnell. On April 25, 1994, the Company entered into a
Settlement Agreement (the "Bushnell Settlement Agreement") with Mr. Bushnell
under which Mr. Bushnell released the Company from certain obligations. Pursuant
to the Bushnell Settlement Agreement, ACTV issued to Mr. Bushnell, among other
consideration, a promissory note in the principal amount of $190,000, payable in
two installments on June 30, 1995, and June 30, 1996. In January 1995, the
Company and Mr. Bushnell agreed to a discounting of the note for payment in full
at that time.
4. The Company's balance sheet at June 30, 1996 reflects a credit to
shareholders' equity of $55,000 related to options issued but not yet vested at
a price below the prevailing market price on the date of issuance. The options
were issued to acquire a patent in September 1995. The Company's balance sheet
at June 30, 1996 also reflects a debit to shareholders' equity of $567,500
related to non-recourse loans made by the Company to certain employees in August
1995 to purchase the Company's common stock by exercising options. The due dates
of the non-recourse loans correspond with the respective expiration dates of the
options exercised.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
ACTV, Inc. (the "Company") was organized to develop and market ACTV programming
technology, which permits each viewer to simultaneously experience
individualized television programming. Since its inception, the Company has
incurred operating losses approximating $34.4 million related directly to the
development and marketing of the ACTV programming technology.
ACTV's individualized programming is designed to work with both single and
multiple channels of 6MHz band-width and with different modes of transmission:
cable, direct broadcast satellite ("DBS"), multi-microwave distribution systems
("MMDS"), broadcast systems, distance learning networks and closed circuit
televisions systems. It is compatible with commonly available one-way analog
systems as well as the newer digital systems that have recently begun to be
deployed.
ACTV's strategy is to generate revenues from the sale of ACTV programming that
it either owns, has licensed or that has been created by a third party under a
license from ACTV, including fees paid by subscribers to premium cable networks
in which the Company has an ownership interest. The Company's mission is to
improve the quality of entertainment and education television programming.
The chief markets presently targeted by the Company for the ACTV programming
technology are in-home entertainment, education (with an emphasis on distance
learning), site-based entertainment and Internet applications. The Company seeks
to exploit these markets, principally in the U.S., through licensing the
programming technology, by creating joint venture relationships, and by direct
sales.
In March 1988, the Company formed ACTV Entertainment Inc. ("ACTV Entertainment")
as an equal shareholder with Le Groupe Videotron ("LGV") of Canada. The Company
granted to ACTV Entertainment the exclusive right to use the Company's
programming technology in the United States DBS, cable, and broadcast television
markets.
In June 1993, at the Company's request, LGV withdrew from its ownership in ACTV
Entertainment and the Company became the sole shareholder of ACTV Entertainment
under the terms of an agreement with a subsidiary of LGV. In exchange for
gaining full ownership and control of ACTV Entertainment in the settlement and
for the conversion of LGV's exclusive license for Canada and Europe to a
non-exclusive license, the Company ceased providing programming to LGV and
agreed to give up the license fee revenue it had received from LGV for LGV's use
of the programming technology in Canada and Europe.
In March 1995, the Company formed The Los Angeles Individualized Television
Network, Inc., one of its wholly-owned subsidiaries, to operate the Company's
individualized television trial in Southern California. If the trial is
successful, this subsidiary will operate the planned regional television network
targeting approximately 4.8 million sports subscribers in the region that
reaches from Los Angeles to San Diego and Phoenix.
The trial, which marks the introduction of the Company's first U.S. regional
individualized network (the "Regional Network"), began in the Los Angeles area
in May 1995. The trial involves 1,000 cable subscribers and will run throughout
most of 1996 and may extend into 1997. The Company believes that the Regional
Network is the first programming service in the U.S. to both enhance existing
programming and offer new individualized content.
Programming for the Regional Network is being provided to ACTV by Prime Sports
West, a unit of Liberty Media's Liberty Sports division, which has approximately
4.8 million subscribers in the
6
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Southwest region of the U.S.; Cable News Network, Inc. ("CNN"); the Game Show
Network, a subsidiary of Sony Entertainment, Inc. ("Sony"); and Viacom. Liberty
Media is jointly owned by Telecommunications Inc. ("TCI") and Fox Sports. The
cable operator for the Regional Network is TCI of Ventura County.
The Company has established five new wholly-owned subsidiaries that would
operate additional regional individualized networks covering the San Francisco,
Chicago, New York, Atlanta and Texas regions in the event that the Company
decides to expand and provide similar services to those of the Regional Network
in other regions across the U.S. To date, the five new wholly-owned subsidiaries
have not engaged in any business activities, nor does the Company have any
present intention to launch their activities. The Regional Network, and any
expansion plans related thereto, is part of the Company's plan to develop the
entertainment division of its business which, to date, does not generate any
revenue for the Company.
In July 1992, the Company entered into an agreement with a subsidiary of the
Washington Post Company (the "Post Company") to form ACTV Interactive, a
partnership organized for the purpose of marketing products and services
incorporating the programming technology to the education marketplace. The
subsidiary of the Post Company owned a 51% share.
On March 11, 1994 the Company purchased the Post Company's full 51% interest in
ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million
in cash at closing and a $2 million 8% note due December 31, 1996 (the "Note").
Subsequently, all operations by the Company's subsidiaries associated with the
education market have been consolidated with the results of the Company. During
1995, the Note, including accrued interest, was paid in full.
In January 1995, the Company granted an exclusive license to Greenwich
Entertainment Group ("The Greenwich Group") for the use of its programming
technology in the theater environment, specifically in shopping malls, museums
and entertainment centers. The Company's agreement with The Greenwich Group
stipulates the payment of a license fee of 8% to 10% of annual ticket sales per
theater, dependent upon each theater's volume. The agreement also calls for
minimum annual payments of $200,000 in 1996, $500,000 in 1997, $1,000,000 in
1998, $1,250,000 in 1999 and $1,500,000 in the year 2000 and thereafter. If the
minimum payments are not paid, the Company has the right to cancel the license.
Additionally, the Company has made equity investments in The Greenwich Group of
$24,325 in March 1996 and $250,000 in April 1996.
In July 1995, the Company formed 3D Virtual, Inc., a wholly owned subsidiary
engaged in the development of three dimensional applications of the Company's
programming technology.
In August 1996, the Company formed two wholly-owned subsidiaries, ACTV
Financing, Inc. and ACTV Holding, Inc. to facilitate a fundraising transaction
in which the Company raised $10 million (before expenses and commissions related
to the fund raising). Pursuant to this transaction, the subsidiaries issued
preferred shares that are convertible into common shares of ACTV, Inc. beginning
January 1, 1997. The conversion price of the preferred shares is at a discount
to the market price for the ACTV, Inc. common shares at the time of conversion.
The percentage discount increases as the length of the holding period prior to
conversion increases, from a base of 14% for conversion in January 1997 to a
maximum of 30.375% for conversion in September 1997 or thereafter. The $10
million financing consists of $4 million in immediately available funds, with
the remaining $6 million paid into an escrow account. The escrow funds are to
become available to the Company contingent upon the satisfaction of certain
conditions in the contracts with the holders of the preferred stock.
7
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RESULTS OF OPERATIONS
Comparison of Six Month Periods Ended June 30, 1996 and June 30, 1995
During the six month period ended June 30, 1996, the Company's revenues
increased 3% to $773,596, from $753,889 in the six month period ended June 30,
1995. In the more recent period, the Company's revenues derived from education
sales, as well as from license and executive producer fees related to its
agreement with The Greenwich Group. All revenues in the six month period ended
June 30, 1995 were derived from the education market.
Cost of sales in the six months ended June 30, 1996, was $314,610, an increase
of 48% over cost of sales of $212,337 in the six months ended June 30, 1995. The
Company's gross margin declined to 59% in the more recent period, from 72% in
the corresponding 1995 period. The decline was due to the inclusion in the more
recent period of executive production fees, which carry a lower profit margin
than the Company's other revenue sources, and from proportionately lesser
revenues from education programs, when compared to the six months ended June 30,
1995. Education programs have a higher gross margin than other education
products sold by the Company.
Total expenses excluding cost of sales and interest expense in the six months
ended June 30, 1996, increased 15%, to $4,567,875, from $3,967,243 in the
comparable period in 1995. The increase was due also to higher research and
development expenses, and to greater operating and selling and administrative
costs associated with the Company's interactive television network trial in
California. The trial was launched in May 1995.
Depreciation and amortization expense for the six months ended June 30, 1996,
increased 3% to $538,422, from $524,802 for the six months ended June 30, 1995.
This increase was related primarily to the equipment purchased for the
California trial referred to above.
The Company incurred no interest expense for the six months ended June 30, 1996,
compared to interest expense of $73,595 in the prior year's comparable period.
During 1995, the Company paid in full all of its short and long-term interest
bearing obligations. Interest income in the six months ended June 30, 1996, was
$55,870, compared with $56,470 in the six months ended June 30, 1995.
For the six months ended June 30, 1996, the Company's net loss was $4,053,019,
or $.35 per share, an increase of 18% over the net loss before extraordinary
gain of $3,442,816, or $.36 per share, incurred in the prior year's comparable
period. The Company recorded extraordinary gains of $94,117 in the six months
ended June 30, 1995, the result of the extinguishment of debt obligations for
value that was less than the amounts recorded on the Company's books for such
obligations. Net loss after extraordinary gain for the six months ended June 30,
1995, was $3,348,699, or $.35 per share.
Comparison of Six Month Periods Ended June 30, 1995 and June 30, 1994
During the six month period ended June 30, 1995, the Company's revenues
increased 62%, to $753,889, from $464,478 in the six month period ended June 30,
1994. The increase was the result of higher education sales as well as the
Company's recognition for a greater proportion of the more recent period of the
sales of its education subsidiary, ACTV Interactive. Prior to the Company's
purchase in March 1994 of the Washington Post's 51% interest in this subsidiary,
in which the Company previously owned the remaining 49% interest, the results of
ACTV Interactive were accounted for under the equity method of accounting.
Cost of sales in the six months ended June 30, 1995, was $212,337, an increase
of 53% over cost of sales of $138,446 in the six months ended June 30, 1994.
8
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Total expenses excluding cost of sales and interest expense in the six months
ended June 30, 1995, increased 50%, to $3,967,243, from $2,639,990 in the
comparable period in 1994. This increase was partially the result of the
Company's recognition in the more recent period, as explained above, of the
expenses of ACTV Interactive, which for a portion of the 1994 period were
reported separately. The increase was due also to higher research and
development expenses, and to greater general and administrative costs associated
with the launch in May 1995 of the Company's interactive television network
trial in California.
Depreciation and amortization expense for the six months ended June 30, 1995,
increased 48% to $524,802, from $353,442 for the six months ended June 30, 1994.
This increase was partially the result of the Company's amortization for the
entire six month period of 1995 versus a portion of the same period in 1994 of
goodwill arising from the purchase of the Washington Post's interest in ACTV
Interactive. In addition, for the six months ended June 30, 1995, the Company
recorded increased depreciation expense related to equipment purchased for the
California trial referred to above.
The Company's interest expense for the six months ended June 30, 1995, decreased
48%, to $73,595, compared to $141,129 in the prior year's comparable period. The
decrease was due in part to the elimination of expense related to original issue
discount on the $1.5 million convertible note payable to the Washington Post
Company. The full principal value of this note, plus all accrued interest, was
converted by the Post Company into common shares of ACTV, Inc. in March 1994.
Interest expense declined also due to a decrease in notes payable during the
more recent period. Interest income in the six months ended June 30, 1995, was
$56,470, compared with $30,637 in the six months ended June 30, 1994. The
increase resulted from higher available cash balances in the more recent period.
For the six months ended June 30, 1995, the Company's net loss before
extraordinary items was $3,442,816, or $.36 per share, an increase of 42% over
the net loss of $2,567,950, or $.34 per share, incurred in the prior year's
comparable period. The Company recorded extraordinary gains of $94,117 in the
six months ended June 30, 1995 and $231,845 in the six months ended June 30,
1994, the result of the extinguishment of certain obligations for value that was
less than the amounts recorded on the Company's books for such obligations. Net
loss after extraordinary gain for the six months ended June 30, 1995, was
$3,348,699, or $.35 per share, an increase of 43% over the net loss after
extraordinary gain for the comparable period of 1994 of $2,336,105, or $.31 per
share.
Comparison of Three Month Periods Ended June 30, 1996 and June 30, 1995
During the three month period ended June 30, 1996 ("Second Quarter 1996"), the
Company's revenues increased approximately 3%, to $422,922, from $412,255 in the
three month period ended June 30, 1995 ("Second Quarter 1995"). In the more
recent quarter, the Company's revenues derived from education sales, as well as
from license and executive producer fees related to its agreement with The
Greenwich Group. All revenues in Second Quarter 1995 were derived from the
education market.
Cost of sales in Second Quarter 1996 was $106,600, a 15% decrease compared to
Second Quarter 1995's cost of sales of $125,236. The Company's gross margin
increased to 75% in the more recent quarter, from 70% in the corresponding 1995
quarter. The gross margin increase was due principally to a higher percentage of
education program sales in the revenue mix for the more recent quarter.
Education programs have a higher gross margin than other education products sold
by the Company.
Total expenses excluding cost of sales and interest expense increased
approximately 9% in Second Quarter 1996, to $1,831,091, from $1,676,240 in
Second Quarter 1995. The increase was due principally to higher operating and
selling and administrative expenses associated with the Company's operation of
its Los Angeles Regional Network.
Depreciation and amortization expense decreased in Second Quarter 1996 to
$243,950, from $309,530 in Second Quarter 1995. The decrease resulted from the
full depreciation prior to Second Quarter 1996
9
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of certain equipment used in the Los Angeles Regional Network. The depreciation
expense in Second Quarter 1995 related to this equipment was $66,000.
The Company incurred no interest expense in Second Quarter 1996, compared to
interest expense of $33,333 in Second Quarter 1995. During 1995, the Company
paid in full all of its short and long-term interest bearing obligations.
Interest income in Second Quarter 1996 was $22,633, a decrease of 15% compared
with $26,691 in Second Quarter 1995. The decrease resulted from lower available
cash balances in the more recent period.
The Company's net loss in Second Quarter 1996 increased approximately 7%, to
$1,492,136, or $.13 per share, from $1,395,863, or $.15 per share, in Second
Quarter 1995, principally the result of greater operating and selling and
administrative expenses related to the Los Angeles Regional Network.
Comparison of Three Month Periods Ended June 30, 1995 and June 30, 1994
During the three month period ended June 30, 1995 (the "Second Quarter 1995"),
the Company's revenues increased 7% to $412,255, compared to revenues of
$384,637 for the three month period ended June 30, 1994 (the "Second Quarter
1994"). The increase was the result of higher education sales in the more recent
quarter.
Cost of sales in the Second Quarter 1995 was $125,236, a decrease of 7% from
cost of sales of $134,214 in the Second Quarter 1994. The decrease was due to
proportionately greater sales of higher margin education software in the Second
Quarter 1995.
Total expenses excluding cost of sales and interest expense declined slightly in
the Second Quarter 1995, to $1,676,240, from $1,680,399 in the Second Quarter
1994. This decrease resulted from lower operating expenses coupled with a gain
related to stock appreciation rights, which more than compensated for higher
selling and administrative expenses as well as increased depreciation and
amortization expenses in the more recent period. The increase in selling and
administrative expenses was due to higher research and development expenses for
both the education and entertainment markets, and to greater general and
administrative costs associated with the launch in May 1995 of the Company's
interactive television network trial in California.
Depreciation and amortization expense increased in the Second Quarter 1995 to
$309,530, from $217,692 in the Second Quarter 1994, due to higher depreciation
expense related to equipment purchased for the California trial.
Interest expense declined 26% in the Second Quarter 1995, to $33,333, from
$45,057 in the Second Quarter 1994, due to decreased note payable obligations in
the more recent quarter. Interest income in the Second Quarter 1995 was $26,691,
compared with $13,527 in the Second Quarter 1994. The increase resulted from
higher available cash balances in the more recent period.
The Company's net loss for the Second Quarter 1995 was $1,395,863 or $.15 per
share, a decrease of 4% compared to the net loss before extraordinary item of
$1,461,506 or $.18 per share incurred in Second Quarter 1994. The Company
recorded an extraordinary gain of $231,845 in the Second Quarter 1994, the
result of the extinguishment of certain obligations for value that was less than
the amounts recorded on the Company's books for such obligations. Net loss after
the extraordinary gain for the Second Quarter 1994 was $1,229,661 or $.15 per
share.
Liquidity and Capital Resources
10
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<PAGE>
Since its inception, the Company (including its operating subsidiaries) has not
generated revenues sufficient to fund its operations, and has incurred operating
losses. Through June 30, 1996, the Company had an accumulated deficit of
approximately $34.4 million. The Company's cash position on June 30, 1996 was
$1,189,507, compared to $3,531,782 on December 31, 1995.
During Second Quarter 1996 the Company used $2,068,308 in cash for its
operations, compared with $1,010,929 in Second Quarter 1995. The increase in
Second Quarter 1996 was due principally to asset and liability changes between
the two periods. The Company met its cash needs in Second Quarter 1996 from the
remaining proceeds of private sales of common stock effected in 1995, as well as
from sales of common stock totaling $1.9 million that were concluded during the
first quarter of 1996. The Company met its cash needs in Second Quarter 1995
from the proceeds of sales of common stock to private investors completed in the
last quarter of 1994 and the first two quarters of 1995.
With respect to investing activities, in Second Quarter 1996 and 1995 the
Company used cash of $398,164 and $424,442, respectively, principally for
equipment purchases related to the Los Angeles Regional Network. The Company's
operating subsidiaries are dependent on advances from the Company to meet their
obligations.
The Company's balance sheets at June 30, 1996 and June 30, 1995 reflect expense
accruals of $621,466 and $1,037,298, respectively, related to the Company's
stock appreciation rights plan.
In August 1996, the Company raised $10 million (before expenses and commissions
related to the fund raising) from the issuance by two wholly-owned subsidiaries
of the Company, ACTV Holdings, Inc. and ACTV Financing, Inc., of convertible
preferred shares to private investors. Pursuant to this transaction, the
subsidiaries issued preferred shares that are convertible into common shares of
ACTV, Inc. beginning January 1, 1997. The conversion price of the preferred
shares is at a discount to the market price for the ACTV, Inc. common shares at
the time of conversion. The percentage discount increases as the length of the
holding period prior to conversion increases, from a base of 14% for conversion
in January 1997 to a maximum of 30.375% for conversion in September 1997 or
thereafter. The $10 million financing consists of $4 million in immediately
available funds, with the remaining $6 million paid into an escrow account. The
escrow funds are to become available to the Company contingent upon the
satisfaction of certain conditions in the contracts with the holders of the
preferred stock.
The Company believes that it has sufficient resources to fund its operations for
the next twelve months, whether or not it receives the $6 million in escrowed
funds. However, if the Company does not receive these funds and does not obtain
additional financing, it may be required to reduce certain planned expenditures
in certain of the markets it is attempting to develop. If management's
assumptions regarding future events prove incorrect, the Company may be unable
to fund its operations, even at a reduced level, for the next twelve months. The
Company has no agreements, arrangements or understanding to obtain additional
financing, other than as disclosed herein. There can be no assurance that
additional financing, if it should be needed, will be available on terms
satisfactory to the Company or at all.
In the three months ended March 31, 1996, the Company raised approximately $1.9
million from the private sale of shares of the Company's common stock.
The Company believes that it may be required to expend approximately $300,000 in
the remainder of 1996 to facilitate the completion of current research and
development projects, relating primarily to the development of software to
implement the Company's programming technology in digital set-top terminals.
The Company does not have any material contractual commitments for capital
expenditures.
11
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Impact of Inflation
Inflation has not had any significant effect on the Company's operating costs.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a party.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- Exhibit 11, Computation of Loss per Share
(b) Reports on Form 8-K: None.
12
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTV, Inc.
Registrant
Date: August 13, 1996 /s/ William C. Samuels
--------------- ----------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: August 13, 1996 /s/ Christopher C. Cline
--------------- ------------------------
Christopher C. Cline
Vice President (principal
financial and accounting officer)
13
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<PAGE>
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
SIX MONTH PERIOD THREE MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
<S> <C> <C> <C> <C>
1995 1996 1995 1996
---------- ---------- --------- ----------
Weighted average shares outstanding .... 9,452,332 11,684,987 9,493,367 11,891,160
Common stock equivalents ............... -- -- -- --
---------- ---------- ---------- -----------
Total ......................... 9,452,332 11,684,987 9,493,367 11,891,160
========== ========== ========== ===========
Net loss before extraordinary gain .. $3,442,816 $4,053,019 $1,395,863 $ 1,492,136
Net loss after extraordinary gain ... $3,348,699 $4,053,019 $1,395,863 $ 1,492,136
========== ========== ========== ===========
Loss per share before extraordinary gain $ .36 $ .35 $ .15 $ .13
Loss per share after extraordinary gain $ .35 $ .35 $ .15 $ .13
========== ========== ========== ===========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,189,507
<SECURITIES> 0
<RECEIVABLES> 467,925
<ALLOWANCES> 0
<INVENTORY> 220,993
<CURRENT-ASSETS> 2,143,051
<PP&E> 842,901
<DEPRECIATION> 182,983
<TOTAL-ASSETS> 6,676,200
<CURRENT-LIABILITIES> 1,817,834
<BONDS> 0
<COMMON> 1,189,211
0
0
<OTHER-SE> 3,669,155
<TOTAL-LIABILITY-AND-EQUITY> 6,676,200
<SALES> 763,515
<TOTAL-REVENUES> 773,596
<CGS> 314,610
<TOTAL-COSTS> 3,974,870
<OTHER-EXPENSES> 593,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,053,019)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,053,019)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,053,019)
<EPS-PRIMARY> $.35
<EPS-DILUTED> $.35
</TABLE>
