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 September 30, 1997
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. Identification No.)
incorporation or organization)
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)
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Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of exchange on which registered
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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 13, 1997, there were 14,434,612 shares of the registrant's common
stock outstanding.
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (Unaudited)
December 31, September 30,
1996 1997
Current Assets:
Cash and cash equivalents ............... $ 6,520,756 $ 2,014,980
Accounts receivable ..................... 410,193 588,497
Education equipment inventory ........... 337,504 346,672
Other ................................... 316,962 269,636
------------ ------------
Total current assets ................ 7,585,415 3,219,785
------------ ------------
Property and equipment-net .............. 724,089 1,996,615
------------ ------------
Other Assets:
Patents and patents pending-net ......... 253,779 235,525
Goodwill-net ............................ 3,067,560 2,747,781
Other ................................... 61,781 826,244
------------ ------------
Total other assets .................. 3,383,120 3,809,550
------------ ------------
Total .......................... $ 11,692,624 $ 9,025,950
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ... $ 1,594,655 $ 1,543,250
Deferred stock appreciation rights ...... 701,517 0
Preferred dividends payable ............. 195,384 470,653
------------ ------------
Total current liabilities ........... 2,491,556 2,013,903
------------ ------------
Total liabilities ................... 2,491,556 2,013,903
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, none issued ............ -- --
Convertible preferred stock, no par value,
436,000 shares authorized: issued and
outstanding 400,000 at December 31, 1996,
318,917 at September 30, 1997 ............. 9,115,664 7,079,032
Convertible preferred stock, .01 par value,
1,000,000 shares authorized: issued and
outstanding 0 at December 31, 1996, 52,000
at September 30, 1997, liquidation value
of $1,300,000 ............................. -- 520
Common stock, $.10 par value, 65,000,000
shares authorized: issued and outstanding
11,787,106 at December 31, 1996,
14,374,925 at September 30, 1997 ............. 1,178,711 1,437,493
Additional paid-in capital ................... 38,272,205 43,028,137
Notes receivable from stock sales ............ (200,000) (200,000)
Accumulated deficit .......................... (39,165,512) (44,333,135)
------------ ------------
Total shareholders' equity ............. 9,201,068 7,012,047
------------ ------------
Total ............................. $ 11,692,624 $ 9,025,950
============ ============
See Notes to Consolidated Financial Statements
2
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Periods Three Month Periods
Ended September 30, Ended September 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues .................... $1,093,127 $1,534,295 $329,612 $191,440
License fees from related party ... 12,689 -- 2,608 --
---------- ---------- ---------- ----------
Total revenues ................. 1,105,816 1,534,295 332,220 191,440
Cost of Sales ..................... 480,321 434,287 165,711 78,847
---------- ---------- ---------- ----------
Gross profit ................... 625,495 1,100,008 166,509 112,593
Expenses:
Operating expenses ................ 1,407,558 957,516 401,570 246,076
Selling and administrative ........ 4,614,826 4,919,822 1,645,944 1,306,566
Depreciation and amortization ..... 362,563 150,210 37,327 51,722
Amortization of goodwill .......... 319,779 319,779 106,593 106,593
Stock appreciation rights ......... (162,516) (346,892) (217,099) (29,651)
---------- ---------- ---------- ----------
Total expense .................. 6,542,210 6,000,435 1,974,335 1,681,306
Interest (income) .................... (66,403) (103,239) (10,533) (11,156)
---------- ---------- ---------- ----------
Net loss ............................. 5,850,312 4,797,188 1,797,293 1,557,557
Preferred stock dividend ............. 28,493 370,435 28,493 121,041
---------- ---------- ---------- ----------
Net loss applicable to common stock ..
shareholders $5,878,805 $5,167,623 $1,825,786 $1,678,598
========== ========== ========== ==========
Loss per common share ................ $.50 $.42 $.15 $.13
Weighted average number of common
shares outstanding ................... 11,723,874 12,338,339 11,799,797 13,171,584
</TABLE>
See Notes to Consolidated Financial Statements
3
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Periods Three Month Periods
Ended September 30, Ended September 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................. ($5,878,805) ($5,167,623) ($1,825,786) ($1,678,598)
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ......................... 682,341 469,989 143,919 158,315
Stock appreciation rights ............................. (162,516) (701,517) (217,099) (29,651)
Common stock issued for preferred
dividends ............................................. -- 95,167 -- 73,759
Common stock issued for services ...................... 114,047 165,000 -- 150,000
Changes in operating assets and liabilities:
Accounts receivable ................................... (4,284) (178,304) 114,350 272,641
Other assets .......................................... (191,800) (185,189) 19,363 (38,286)
Accounts payable and accrued expenses ................. 175,436 (51,405) 69,460 (11,212)
Education equipment inventory ......................... (77,895) (9,168) 30,880 (34,403)
Convertible preferred stock dividends
payable ............................................... 28,493 275,269 28,493 47,284
----------- ----------- ----------- -----------
Net cash (used) in operating
activities ................................... (5,314,983) (5,287,781) (1,636,420) (1,090,151)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Investment in computer software
production ............................................ -- (531,948) -- (132,488)
Investment in property and equipment .................. (699,564) (1,404,482) (132,367) (1,181,215)
----------- ----------- ----------- -----------
Net cash used in investing
activities ............................................ (699,564) (1,936,430) (132,367) (1,313,703)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock .................... 1,903,485 1,428,000 -- 1,428,000
Net proceeds from sale of preferred stock ............. 3,600,601 1,290,435 3,600,601 1,300,000
----------- ----------- ----------- -----------
Net cash provided by financing
activities ................................................. 5,504,086 2,718,435 3,600,601 2,728,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ................................................ (510,461) (4,505,776) 1,831,814 324,146
Cash and cash equivalents,
beginning of period ................................... 3,531,782 6,520,756 1,189,507 1,690,834
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period ......................................... 3,021,321 2,014,980 3,021,321 2,014,980
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1997
1. 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.
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, 1996. 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, 1997 and December 31, 1996 reflect
capitalized software production costs of $531,948 and $0, respectively,
classified as a component of "Other" non-current assets.
3. During 1996, the Company raised approximately $9.1 million in net proceeds
from a private placement of 5% convertible preferred stock (the "Convertible
Preferred Stock") issued by a wholly-owned subsidiary. The Convertible Preferred
Stock is convertible into Common Stock of ACTV, Inc. at varying discounts to the
market price of the Common Stock. After September 1, 1997, holders of the
Convertible Preferred Stock will be 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. The Company believes that it is highly likely that the
holders of the Convertible Preferred Stock will elect to convert their stock
into Common Stock of the Company and, accordingly, has included the Convertible
Preferred Stock in its consolidated statement of shareholders' equity.
4. In September 1997 the Company raised approximately $1.3 million from a
private placement of 7% exchangeable preferred stock (the "Exchangeable
Preferred Stock") issued by ACTV Entertainment Inc. In November 1997, the
holders of the Exchangeable Preferred Stock exchanged, one-for-one, the
Exchangeable Preferred Stock for Series A 7% Convertible Preferred Stock issued
by ACTV, Inc. ("Series A Preferred Stock"). The Series A Preferred Stock is
convertible into the Company's Common Stock at $1.50 per share, and has a
liquidation preference of $25 per share (face value) plus any accrued and unpaid
dividends.
The Company's continued marketing of all its products and services on
planned levels and timetables is dependent upon the Company's obtaining the
additional capital necessary to support the Company's future operations at these
levels. Management is continuing its efforts to obtain such additional
financing. If the Company is not successful in obtaining such additional
financing, management believes that the Company can fund its operations at least
through the end of September 1998. To fund its operations at least through the
end of September 1998, without additional financing, the Company will be
required to reduce, or forego entirely, certain planned expenditures, including
all expenditures related to the launch of its regional entertainment networks
and to the entertainment area of its business in general. If management's
assumptions regarding future events prove incorrect, the Company may be unable
to fund its operations, even at a reduced level, through the end of September
1998.
5
<PAGE>
5. The Company's balance sheets at September 30, 1997 and December 31, 1996
reflect credits to shareholders' equity of $27,500, and $55,000 respectively
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 sheets at September 30, 1997 and
December 31, 1996 also reflect a debit to shareholders' equity of $200,000
related to a non-recourse loan made by the Company to an employee in August 1995
to purchase the Company's common stock by exercising options. The due date of
the non-recourse loan corresponds with the expiration date of the option
exercised.
6. Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, effective for interim and annual periods ending after December 15, 1997,
establishes standards for computing and presenting earnings per share ("EPS")
and simplifies the standards for computing EOS currently found in Accounting
Principles Board Opinion No. 15, Earnings Per Share. Common stock equivalents
under APB No. 15, with the exception of contingently issuable shares (shares
issuable for little or no cash consideration), are no longer included in the
calculation of primary, or basic EPS. Under SFAS No. 128, contingently issuable
shares are included in the calculation of primary EPS. The Company has
determined that the adoption of this statement will have no material effect on
the financial statements.
7. SFAS No. 129, Disclosure of Information about Capital Structure, effective
for periods ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure, for all entities. The statement
requires disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and participation
rights) including dividend and liquidation preferences, participant rights, call
prices and dates, conversion of exercise prices and redemption requirements.
Adoption of this statement will have no effect of the Company as it currently
discloses the information specified.
8. SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. The Company has determined that the adoption
of this statement will have no effect on the financial statements.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY
To the extent that the information presented in this Form 10-Q discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, the successful and timely development and acceptance of
new products and markets and the availability of sufficient funding to effect
such product and/or market development.
ACTV, Inc. (the "Company" or "ACTV") has developed proprietary technologies
that individualize television programming ("Individualized Programming").
Individualized Programming, in the Company's opinion, significantly enhances the
quality of television content by allowing the viewer to make instant and
seamless changes within the live or pre-recorded television programming being
viewed. Individualized Programming appears to be a standard TV program, but in
fact is a multi-path telecast of several elements of programming material, such
as instant replay, isolation cameras, statistical data, or alternative story
lines. There is no limit to the number of viewers who can interact
simultaneously with a program enhanced with the Company's Individualized
Programming. Since its inception, the Company has incurred operating losses
approximating $44.3 million related directly to the development and marketing of
ACTV's Individualized Programming.
The chief markets presently targeted by the Company for Individualized
Programming are in-home entertainment and education (with an emphasis on
distance learning and Internet applications). The Company seeks to exploit these
markets, principally in the U.S., through licensing its Individualized
Programming, by creating joint venture relationships, and by direct sales.
Individualized Programming is designed to work with both single and
multiple channels of 6 MHz band-width and with different modes of transmission:
cable, direct broadcast satellite ("DBS"), wireless cable, broadcast systems and
distance learning networks. The Company's initial emphasis in entertainment is
to deploy its programming over the cable systems that have upgraded their signal
origination facilities (referred to in the industry as "headends") for digital
delivery. The Company's Individualized Programming can be received by cable
viewers who have digital set-top terminals into which the Company's software
application has been downloaded. The Company is emphasizing digital delivery
over analog primarily because the channel capacity in digital transmission is
greater.
The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regional entertainment networks. The Company's
ability to develop differentiated, high-quality branded entertainment
programming in a digital environment is initially based on its key strategic
alliance with FOX Sports Net. FOX Sports Net consists of ten owned-and-operated
regional sports networks, along with numerous affiliated systems across the
country. Launched on November 1, 1996, the network is the United States sports
telecasting arm of the worldwide sports alliance formed among News Corp.,
Liberty Media, and Tele-
7
<PAGE>
Communications Inc. In the fall of 1997, the network expanded its reach to
nearly 60 million subscribers with the launch of numerous SportsChannel regional
networks under the FOX Sports Net banner.
The Company has a national agreement with FOX Sports Net to license
programming from each of its regional sports affiliates and to offer enhanced
FOX Sports Net programming to any distributor that carries the corresponding
regional FOX Sports Net channel. This agreement extends through June 2003.
The FOX Sports Net national agreement followed the completion of the
Company's eighteen-month Individualized Programming trial within the TCI of
Ventura County cable system in greater Los Angeles. Sports programming for the
trial was supplied to ACTV by FOX Sports West. Viewers participating in the
trial received individualized FOX Sports West telecasts of Lakers and Clippers
basketball, Kings and Ducks hockey, and California Angels baseball, among other
offerings.
The Company intends to launch its regional individualized sports networks
in the late fourth quarter of 1997 or early in 1998, beginning with the region
served by FOX Sports Southwest. FOX Sports Southwest distributes college and
professional sports programs to 5.1 million households in Texas, Louisiana,
Arkansas, Oklahoma and nine New Mexico counties. The Company has also announced
plans to launch individualized networks in the regions served by FOX Sports
West, FOX Sports Northwest, and the Sunshine Network, an affiliate in Florida.
The Company will be responsible for the incremental content, transmission,
delivery and master control costs incurred in connection with the Individualized
Programming to be presented through its regional networks.
Although the Company's intention is to launch the first of its regional
networks within the next several months, there is no assurance that it will
secure the funding necessary to effect such a launch or any future launches, or
that other factors might not delay or prohibit the successful implementation of
the plan.
The Company's intention is for its regional networks to offer premium cable
programming services that are advertiser-supported, with monthly subscription
prices comparable to other U.S. premium channels. The projected regional network
expansion 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. There
can be no assurance that the regional networks, even if launched, will generate
significant revenues for the Company.
In August 1997, NextLevel Systems, Inc. invested $1 million in Common Stock
of the Company and agreed to market, jointly with ACTV, Individualized
Programming applications. NextLevel (formerly part of General Instrument
Corporation) is the leading supplier of digital television headend systems and
digital set-top terminals. The Company and NextLevel had previously announced
that ACTV's Individualized Programming would be incorporated into NextLevel's
new MPEG-2 digital set-top cable and wireless terminals.
The Company's objective in education is to create and deliver
individualized instruction to the classroom through distance learning networks.
ACTV's Individualized Programming enables students in remote classrooms to
respond to questions during a televised lesson from the
8
<PAGE>
program's instructor. After choosing a response, each student receives
individualized audio feedback based on his or her input.
The instructor is able to create and include individualized segments in a
TV lesson by means of the Company's easy-to-use digital television authoring
software. This Windows-based application permits the instructor to enter
questions into a computer and then record, in his or her own voice,
individualized audio responses. The responses tell students more than whether
they are right or wrong -- they provide explanations and reinforcement.
During a live lesson telecast, the instructor receives an instantaneous
graphical summary of the student responses on a monitor in the studio. This
two-way communication enables each student to receive the benefit of individual
attention, while the teacher gets real-time, empirical data on the effectiveness
of the televised lesson.
In early 1997, the Company began the development of the first applications
of its Java-based software suite, "eSchool," which permits an instructor to use
the Internet as an accompanying instructional tool during a live video distance
learning session. Java is a computer programming language developed for the
Internet by Sun Microsystems.
eSchool Online's software enables instructors to stream web content to
their students' desktop computers in sync with distance learning video content
that is presented simultaneously. eSchool Online's user software provides each
student with a PC interface that displays three separate instructional elements
together on-screen: a television lesson received directly by the PC (or played
on a TV adjacent to the computer); Internet web sites, delivered to each
student's computer at pre-determined times during the lesson to support the
televised content; and an interactive eSchool "chat" application, which promotes
student collaboration and student/teacher dialogue. eSchool software allows
students and teachers in multiple locations to share a "virtual classroom."
The Company operates directly and through wholly-owned subsidiaries. The
principal subsidiaries are ACTV Entertainment, Inc., which is primarily
responsible for the Company's activities in the entertainment market; The Texas
Individualized Television Network, Inc., which will operate the Company's first
individualized regional sports network; and ACTV Net, Inc. ("Net"), which is
responsible for the Company's education business. Education accounts for all of
the Company's current revenues.
For purposes of discussing the combined statements of the Company and its
subsidiaries, all intercompany items have been eliminated.
RESULTS OF OPERATIONS
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 derived from education sales as well as from
license and executive producer fees. The revenue increase in the
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<PAGE>
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 and interest expense 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.
Net loss applicable to common shareholders for the nine months ended
September 30, 1997, the Company's decreased 12% to $5,167,623, or $.42 per
share, compared with the net loss of $5,878,805, or $.50 per share, incurred in
the prior year's comparable period. The decrease was the result principally of
greater total revenues and higher gross profit during the more recent nine-month
period.
Comparison of Nine Month Periods Ended September 30, 1996 and September 30, 1995
During the nine month period ended September 30, 1996, the Company's
revenues increased 3% to $1,105,816, from $1,075,925 in the nine month period
ended September 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 nine
month period ended September 30, 1995 were derived from the education market.
Cost of sales in the nine months ended September 30, 1996, was $480,321, an
increase of 51% over cost of sales of $318,655 in the nine months ended
September 30, 1995. The Company's gross margin declined to 57% in the more
recent period, from 70% 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
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the nine months ended September 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 nine
months ended September 30, 1996, increased 1%, to $6,542,210, from $6,498,151 in
the comparable period in 1995. While operating expenses and selling and
administrative expenses increased by approximately $1.6 million due to higher
research and development expenses, and to higher expenses associated with the
Company's interactive television network trial in California, stock appreciation
rights expense decreased by approximately $1.4 million. This decrease was due
principally to a lower market price for the Company's common stock at September
30, 1996.
Depreciation and amortization expense for the nine months ended September
30, 1996, decreased 27% to $362,563, from $499,261 for the nine months ended
September 30, 1995. This decrease was due primarily to the relatively higher
depreciation expense related to set-top cable converters purchased for the
California trial that was incurred the 1995 period.
The Company incurred no interest expense for the nine months ended
September 30, 1996, compared to interest expense of $93,596 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 nine months ended
September 30, 1996, decreased 20% to $66,403, compared with $83,150 in the nine
months ended September 30, 1995. The decrease was the result of lower available
cash balances in the more recent period.
For the nine months ended September 30, 1996, the Company's net loss
increased 2%, to $5,878,805, or $.50 per share, compared to the net loss before
extraordinary gain of $5,751,327, or $.59 per share incurred in the prior year's
comparable period. The Company recorded an extraordinary gain of $94,117 in the
nine months ended September 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 nine
months ended September 30, 1995, was $5,657,210, or $.58 per share.
Comparison of Three Month Periods Ended September 30, 1997 and
September 30, 1996
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.
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Total expenses excluding cost of sales and interest expense 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.
The Company's net loss applicable to common shareholders in Third Quarter
1997 decreased approximately 8%, to $1,678,598, or $.13 per share, from
$1,825,786, or $.15 per 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 expense related to the Company's outstanding
convertible preferred stock.
Comparison of Three Month Periods Ended September 30, 1996 and
September 30, 1995
During the three month period ended September 30, 1996 ("Third Quarter
1996"), the Company's revenues increased approximately 3%, to $332,220, from
$322,036 in the three month period ended September 30, 1995 ("Third 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 Third Quarter 1995 were
derived from the education market.
Cost of sales in Third Quarter 1996 was $165,711, a 56% increase compared
to Third Quarter 1995's cost of sales of $106,328. The Company's gross margin
decreased to 50% in the more recent quarter, from 67% in the corresponding 1995
quarter. The gross margin decrease was due to a significantly lower percentage
of education program sales in the revenue mix for the more recent quarter, as
well as to the inclusion in Third Quarter 1996 of lower-margin production
revenues. Education programs have a higher gross margin than other education
products sold by the Company.
Total expenses excluding cost of sales and interest expense decreased
approximately 22% in Third Quarter 1996, to $1,974,335, from $2,530,908 in Third
Quarter 1995. The decrease was due principally to a gain of approximately
$200,000 related to stock appreciation rights in Third Quarter 1996, versus a
corresponding expense of approximately $801,000 in Third Quarter 1995. This
difference more than offset higher operating and selling and administrative
expenses associated with the Company's operation of its California trial during
the more recent quarter.
Depreciation and amortization expense decreased in Third Quarter 1996 to
$37,327, from $187,645 in Third Quarter 1995. The decrease resulted from the
full depreciation prior to Third Quarter 1996 of set-top cable converters
purchased for the California trial.
12
<PAGE>
The Company incurred no interest expense in Third Quarter 1996, compared to
interest expense of $20,001 in Third Quarter 1995. During 1995, the Company paid
in full all of its short and long-term interest bearing obligations. Interest
income in Third Quarter 1996 was $10,533, a decrease of 61% compared with
$26,680 in Third Quarter 1995. The decrease resulted from lower available cash
balances in the more recent period.
The Company's net loss in Third Quarter 1996 decreased approximately 21%,
to $1,825,786, or $.15 per share, from $2,308,521, or $.23 per share, in Third
Quarter 1995, principally the result of lower stock appreciation rights expense,
which more than offset greater operating, selling and administrative expenses
related to the California trial.
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, 1997, the Company had an accumulated
deficit of approximately $44.3 million. The Company's cash position on September
30, 1997 was $2,014,980, compared to $6,520,756 on December 31, 1996.
During the nine month period ended September 30, 1997 the Company used
$5,287,781 in cash for its operations, compared with $5,314,983 in the nine
months ended September 30, 1996.
With respect to investing activities, during the nine month period ended
September 30, 1997 and 1996 the Company used cash of $1,936,430 and $699,564,
respectively. Investing activities, in the more recent nine month period, were
related to master control facility and other equipment purchased, leasehold
improvements, and computer software production costs, while such activities in
the 1996 quarter related to equipment purchases for the Los Angeles trial.
The Company met its cash needs in the nine month period ended September 30,
1997 from the remaining proceeds from the private sale of convertible preferred
stock effected in August 1996, and from the private sale of both common and
convertible preferred stock in July and September 1997. The Company met its cash
needs in the nine month period ended September 30, 1996 from the remaining
proceeds from 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.
During Third Quarter 1997 the Company used $1,090,151 in cash for its
operations, compared with $1,636,420 in Third Quarter 1996.
With respect to investing activities, in Third Quarter 1997 and 1996 the
Company used cash of $1,313,703 and $132,367, respectively. Investing
activities, in the more recent quarter, were related to master control facility
and other equipment purchased, leasehold improvements, and computer software
production costs, while such activities in the 1996 quarter related to equipment
purchases for the Los Angeles trial.
13
<PAGE>
The Company met its cash needs in Third Quarter 1997 from the remaining
proceeds from the private sale of convertible preferred stock effected in August
1996, and from the private sale of both common and convertible preferred stock
in July and September 1997. The Company met its cash needs in Third Quarter 1996
from the remaining proceeds from 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.
In November 1997, the Company raised approximately $750,000 from the
private sale of its Series A 7% Convertible Preferred Stock.
The Company's balance sheets at September 30, 1997 and December 31, 1996
reflect expense accruals of $0 and $701,517, respectively, related to the
Company's stock appreciation rights plan.
The Company believes that it will be required to expend approximately
$200,000 to $350,000 per quarter on an on-going basis for research and
development, relating principally to software for both entertainment and
education products and services.
The Company's continued marketing of all its products and services on
planned levels and timetables is dependent upon the Company's obtaining the
additional capital necessary to support the Company's future operations at these
levels. If the Company is not successful in obtaining such additional financing,
management believes that the Company can fund its operations at least through
the end of September 1998. To fund its operations at least for this period,
without additional financing, the Company will be required to reduce or forego
entirely certain planned expenditures, including all expenditures related to the
launch of its regional entertainment networks and to the entertainment area of
its business in general. If management's assumptions regarding future events
prove incorrect, the Company may be unable to fund its operations, even at a
reduced level, through the end of September 1998.
Statement of Financial Accounting Standards No. 128.
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, effective for interim and annual periods ending after December 15, 1997,
establishes standards for computing and presenting earnings per share ("EPS")
and simplifies the standards for computing EOS currently found in Accounting
Principles Board Opinion No. 15, Earnings Per Share. Common stock equivalents
under APB No. 15, with the exception of contingently issuable shares (shares
issuable for little or no cash consideration), are no longer included in the
calculation of primary, or basic EPS. Under SFAS No. 128, contingently issuable
shares are included in the calculation of primary EPS. The Company has
determined that the adoption of this statement will have no material effect on
the financial statements.
Statement of Financial Accounting Standards No. 129.
SFAS No. 129, Disclosure of Information about Capital Structure, effective
for periods ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure, for all entities. The statement
requires disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and participation
rights) including dividend and liquidation preferences, participant rights, call
prices and dates, conversion of exercise prices and redemption requirements.
Adoption of
14
<PAGE>
this statement will have no effect of the Company as it currently discloses the
information specified.
Statement of Financial Accounting Standards No. 130.
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. The Company has determined that the adoption
of this statement will have no effect on the financial statements.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating costs.
15
<PAGE>
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
16
<PAGE>
(a) Exhibits
11 Computation of Loss per Share
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
17
<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: November 14, 1997 /s/ William C. Samuels
----------------- ----------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: November 14, 1997 /s/ Christopher C. Cline
----------------- ------------------------
Christopher C. Cline
Senior Vice President (principal financial
and accounting officer)
18
<PAGE>
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Nine Month Period Three Month Period
Ended September 30, Ended September 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding ....................... 11,723,874 12,338,339 11,799,797 13,131,584
Common stock equivalents .................................. -- -- -- --
---------- ---------- ---------- ----------
Total ............................................ 11,723,874 12,338,339 11,799,797 13,131,584
========== ========== ========== ===========
Net loss applicable to common shareholders ................ $5,878,805 $5,167,623 $1,825,786 $1,678,598
========== ========== ========== ===========
Loss per share applicable to common
shareholders .............................................. $.50 $.42 $.15 $.13
========== ========== ========== ===========
</TABLE>
19
<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 SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,014,980
<SECURITIES> 0
<RECEIVABLES> 588,497
<ALLOWANCES> 0
<INVENTORY> 346,672
<CURRENT-ASSETS> 3,219,785
<PP&E> 2,856,433
<DEPRECIATION> 859,819
<TOTAL-ASSETS> 9,025,950
<CURRENT-LIABILITIES> 2,013,903
<BONDS> 0
1,437,493
0
<COMMON> 520
<OTHER-SE> 5,574,034
<TOTAL-LIABILITY-AND-EQUITY> 9,025,950
<SALES> 1,534,295
<TOTAL-REVENUES> 1,534,295
<CGS> 434,287
<TOTAL-COSTS> 5,877,338
<OTHER-EXPENSES> 493,532
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,167,623)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,167,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,167,623)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
