UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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. 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 (b) 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on The Nasdaq Stock Market closing price
on April 15, 1998) was $18,868,268.
As of April 15, 1998, there were 16,980,581 shares of the registrant's common
stock outstanding.
1
<PAGE>
The Company's Annual Report on Form 10-K filed March 31, 1998, is being amended
to reflect changes to Part II: Item 6. - Selected Financial Data and Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations; and to Part IV, Item 14. (a)1. - Financial Statements.
PART II
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues(1) $ 164,602 $ 938,416 $ 1,311,860 $ 1,476,329 $ 1,650,955
Operating Expenses(1) 3,443,513 5,734,132 8,272,884 10,240,158 9,120,267
Equity in Net Loss of
ACTV Interactive(2) 506,303 143,500 -- -- --
Loss Before
Extraordinary Item(3) 4,156,955 5,122,010 6,920,906 8,605,097 7,352,441
Net Loss(3) 4,156,955 4,465,240 6,826,789 8,605,097 7,352,441
Loss Applicable to Common
Stock Shareholders(5) 4,156,955 4,465,240 6,826,789 10,300,481 10,358,683
Weighted Average Shares
Outstanding 5,800,134 7,897,278 10,162,128 11,739,768 12,883,848
Loss Per Common Share Before
Extraordinary Item(3)(5) .72 .65 .68 .88 .80
Loss Per Common
Share(3)(5) .72 .57 .67 .88 .80
Balance Sheet Data: 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------- --------- --------- --------- ----------
Working Capital 2,263,225 1,503,703 2,397,027 5,093,859 (1,082,097)
Total Assets 5,920,720 7,733,314 8,551,128 11,692,624 7,901,918
Long Term Obligations 2,220,794 2,325,061 -- -- --
Stockholders' Equity(4) 1,910,603 3,972,543 6,893,853 9,201,068 5,416,290
Total Capitalization 4,131,397 6,297,604 6,893,853 9,201,068 5,416,290
</TABLE>
(1) For the period between January 1, 1993, and March 11, 1994, all education
sales and expenses were reported separately by the Company's 49%
affiliate, ACTV Interactive, and were not consolidated with the Company's
statements of operations. For the remainder of 1994, operational results
related to education were included with those of the Company, as a result
of the Company's March 11, 1994 purchase of the Washington Post Company's
51% interest in ACTV Interactive.
(2) The results of ACTV Interactive are accounted for under the equity method
of accounting for 1993 and for the period January 1, 1994 to March 11,
1994.
(3) Includes for the year ended 12/31/94 an extraordinary gain of $656,770,
($.08 per share) related to the extinguishment of debt and equipment lease
obligations. Includes for the year ended 12/31/95 an extraordinary gain of
$94,117 ($.01 per share) related to the extinguishment of debt
obligations.
(4) No cash or non-cash dividends on Common Stock have been paid or granted
and the Company does not anticipate the declaration or payment of
dividends on Common Stock in the foreseeable future.
(5) Restated for years ended December 31, 1996 and 1997; see Note 16 to
consolidated financial statements.
2
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Item 7. 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-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, the successful and timely development and acceptance of
new products and markets and the availability of sufficient funding to effect
such product and/or market development.
ACTV, Inc. ("the Company") has developed proprietary technologies for
individualized television programming ("Individualized Programming") and for
Internet learning systems ("eSchool"). The Company's products, in general, are
tools for the creation of programming that allows viewer participation for both
television and Internet platforms. The chief market presently targeted by the
Company for its Individualized Programming is in-home entertainment,
particularly sports programming, while for the Internet the market focus is
education, with an emphasis on schools and universities in the United States.
For entertainment applications, the Company's Individualized Programming
gives the viewer the ability to make instant and seamless changes within the
live or pre-recorded television programming being viewed. Individualized
Programming is a multi-path broadcast of several elements of programming
material, such as instant replay, isolation cameras, statistical data, or
additional features. There is no limit to the number of viewers who can interact
simultaneously with a program enhanced with the Company's Individualized
Programming ("ACTV Program" or "ACTV Programming").
For education applications, the Company has developed eSchool Online(TM)
("eSchool"), a Java-based software suite that permits a teacher to use the
Internet as an accompanying instructional tool during a lesson. (Java is a
programming language developed for the Internet by Sun Microsystems.) eSchool
integrates Web content and a chat application with educational video effectively
to create a "virtual" classroom. In addition, the Company markets analog and
digital systems for televised distance learning applications that permit
point-to-multi-point telecasts that can deliver pre-recorded individualized
lessons as well as integrate individualized lessons into live distance learning
class sessions.
Since its inception, the Company has incurred operating losses
approximating $47 million related directly to the development and marketing of
the Individualized Programming and eSchool.
The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regionally based entertainment networks
("Regional Networks") Programming for the Regional Networks is provided through
the Company's strategic alliance with FOX Sports Net. The Company has the rights
to license FOX Sports Net programming from each of FOX Sports Net's regional
sports affiliates and to offer enhanced FOX Sports Net programming to any
distributor that carries the corresponding regional FOX Sports Net channel. The
FOX Sports Net agreement extends through June 2003.
3
<PAGE>
FOX Sports Net is a service of "National Sports Partners," a joint venture
between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks,
which is a 50/50 partnership between News Corp. and Tele-Communications Inc.'s
Liberty Media Corporation. Equally owned by FOX/Liberty Networks and
Cablevision's Rainbow Media Holdings, Inc., the new venture now reaches more
than 58 million homes nationwide.
The Company's business plan is to develop Regional Networks in regions
served by Fox Sports Net, with distribution to be provided by cable operators
that are currently upgrading their service from analog to digital transmission.
Initially, the Regional Networks will feature sports programming, with the
possible introduction of other types of programming in the future. The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers Individualized
Programming on a subscription basis.
The Company plans to launch its first Regional Network in 1998 in the
regions served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes programming to 5.1 million households in Texas,
Louisiana, Arkansas, Oklahoma and nine New Mexico counties. The Southwest
Regional Network will feature individualized telecasts of professional
basketball (Houston Rockets, Dallas Mavericks, San Antonio Spurs), hockey
(Dallas Stars), and baseball (Texas Rangers, Houston Astros), along with college
sports events from the Southeastern, Southland and Western Athletic conferences.
The Company has entered into an agreement with Tele-Communications Inc.
("TCI") under which TCI will distribute and market the Southwest Regional
Network to its digital subscribers in Texas. The agreement also contemplates
potential nationwide distribution by TCI of the Company's regional sports
networks.
The Company also plans to launch additional individualized networks in
regions served by FOX Sports Net. The planned Regional Networks will feature FOX
Sports Net regional programming enhanced by the Company's Individualized
Programming. The Company will be responsible for the incremental content,
transmission, delivery and master control costs incurred in connection with the
product enhancement of the Individualized Programming to be presented through
its Regional Networks.
In August 1997, General Instrument Corp. ("GI") invested $1 million in
common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly
with the Company, Individualized Programming applications. GI is the leading
supplier of digital television headend systems and digital set-top terminals.
The Company and GI had previously announced that the Company's Individualized
Programming would be incorporated into GI's new MPEG-2 digital set-top cable and
wireless terminals.
It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998. However, there is no assurance that it will
secure the funding necessary to effect additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.
The projected Southwest Regional Network and additional network expansion
are part of the Company's plan to develop the entertainment division of its
business, which to date, does not generate any revenue for the Company. There
can be no assurance that the Southwest Regional
4
<PAGE>
Network or other Regional Networks, if launched, will generate significant
revenues for the Company.
The target market for the Company's education products includes schools,
state and local agencies, universities and private business. eSchool consists of
a suite of integrated software products, including content creation software,
student and teacher user software, and database assessment software. In
addition, the Company provides Internet content development assistance, hosting
of eSchool programs on its computer servers, and consulting to schools and
universities.
To date, nearly all of the Company's revenues have been derived from sales
to the education market of eSchool and individualized educational programs and
products. There is no assurance that the Company will be able to successfully
compete in this market, where many of its current and potential competitors are
companies with significantly greater resources than those of the Company.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1996 and December 31, 1997
During the year ended December 31, 1997 ("Fiscal 1997"), the Company's
revenues increased 12%, to $1,650,955, from $1,476,329 for the year ended
December 31, 1996 ("Fiscal 1996"). All revenues during Fiscal 1997 were derived
from the education market, while in Fiscal 1996, the Company's revenues derived
from education sales as well as from license and executive producer fees. The
revenue increase in the more recent period was the result of the inclusion of
sales from eSchool, which was introduced during Fiscal 1997, and higher sales of
distance learning products and services when compared to Fiscal 1996.
Cost of sales decreased 27% in Fiscal 1997, to $471,956 , from $647,488 in
Fiscal 1996, and cost of sales as a percentage of sales revenue decreased to 29%
in the more recent year, from 44% in 1996. The relatively lower cost of sales in
Fiscal 1997 was due to a greater proportion of educational programming revenues
and the inclusion of eSchool sales in 1997. Both eSchool and educational
programming have higher gross margins than the Company's other sources of
revenue.
Total expenses excluding cost of sales and interest expense in Fiscal 1997
decreased 10%, to $8,648,310, from $9,592,670 in the comparable period in 1996.
The decrease was partially attributable to lower operating expenses and
depreciation and amortization expense in the more recent period, which more than
offset an increase in selling and administrative expense. Also, the Company
recorded a gain of $346,892 in Fiscal 1997, compared to an expense of $183,634
related to stock appreciation rights. The difference was the result of a lower
market price for the Company's Common Stock at the end of Fiscal 1997, when
compared to the end of Fiscal 1996. Finally, during Fiscal 1996 the Company
incurred a valuation allowance of $274,325 related to an investment in an
affiliated company and, as a component of Fiscal 1996 selling and administrative
expense, reserved $82,746 against license fee and production service receivables
from this affiliate. During Fiscal 1997, the Company incurred no valuation
allowance.
In Fiscal 1997, direct expenses related to the entertainment and education
markets were approximately $2.7 million and $2.9 million, respectively.
5
<PAGE>
Depreciation and amortization expense for Fiscal 1997 decreased 11%, to
$754,053, from $846,351 for Fiscal 1996. This decrease was due primarily to the
recognition during Fiscal 1996 of amortization expense for programming assets
that were fully amortized during that year.
The Company's had no interest expense for either Fiscal 1997 or Fiscal
1996. Interest income for Fiscal 1997 decreased 26%, to $116,870, compared with
$158,732 in Fiscal 1996. The decrease resulted from lower available average cash
balances in the more recent year.
For the Fiscal 1997 and 1996, the Company recorded $3,006,242 and
$1,695,384, respectively, for dividends or accretions on convertible preferred
stock issuances. All dividend payments were made in the Company's Common Stock.
The increase during Fiscal 1997 is the result of the Company's having preferred
stock outstanding for less than half of the year during Fiscal 1996.
For Fiscal 1997, the Company's loss applicable to common shareholders was
$10,358,683, or $.80 per share, an increase of less than 1% over the loss of
$10,300,481 or $.88 per share, incurred in Fiscal 1996. The increase in net loss
was due principally to higher dividends and accretion, in Fiscal 1997, which
more than offset the positive effects of higher gross margins, lower operating
expenses, lower depreciation, amortization, and stock appreciation rights
expenses during the more recent year.
Comparison of the Years Ended December 31, 1995 and December 31, 1996
During the year ended December 31, 1996 ("Fiscal 1996"), the Company's
revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended
December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly
higher education revenues from distance learning and the recognition of
production revenues in the more recent period (compared to no production
revenues in 1995), which more than offset a small decline in non-distance
learning education sales.
Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in
Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44%
in the more recent year, from 25% in 1995. The relatively higher cost of sales
in Fiscal 1996 was due to a greater proportion of total revenues generated from
lower margin equipment products and production services, as compared to Fiscal
1995's sales mix.
Total expenses excluding cost of sales and interest expense in Fiscal 1996
increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995.
The increase was attributable to higher operating expenses (principally
resulting from the Company's regional individualized network trial in Southern
California), greater research and development expenditures, higher selling and
administrative expenses, and a valuation allowance of $274,325 for the full
amount of the Company's investment in The Greenwich Group. As a component of
Fiscal 1996 selling and administrative expenses the Company also reserved
$82,746 against license fee and production service receivables from The
Greenwich Group. The Greenwich Group has experienced difficulty in raising
sufficient capital to fund its operations and growth and has been unable to pay
the Company for its services and license.
In Fiscal 1996, direct expenses related to the entertainment and education
markets were approximately $2.5 million and $2.6 million, respectively.
6
<PAGE>
Depreciation and amortization expense for Fiscal 1996, decreased 24%, to
$846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to
the relatively higher depreciation expense incurred in Fiscal 1995 that related
to set-top converters purchased for the California trial.
The Company's interest expense for Fiscal 1996, decreased to zero,
compared to $98,392 in the prior year. The decrease was due to the repayment of
in full of the Company's debt obligations during 1995. Interest income for
Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995.
The increase resulted from higher available average cash balances in the more
recent year.
For the year ended December 31, 1996, the Company recorded $1,695,384 for
dividends or accretions to holders of convertible preferred stock issued in
August 1996 by one of its wholly-owned subsidiaries.
For Fiscal 1996, the Company's loss applicable to common shareholders was
$10,300,481 or $.88 per share, an increase of 51% over the loss of $6,826,789 or
$.67 per share, incurred in Fiscal 1995. Included in the Fiscal 1995 net loss is
an extraordinary gain of $94,117, or $.01 per share as 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. The increase in loss
applicable to common shareholders was due to higher dividends and accretions,
increased operating, selling and administrative expenses and lower operating
margins during the more recent year, as noted above.
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 December 31, 1997, the Company had an accumulated
deficit of approximately $51 million. The Company's cash position on December
31, 1997, was $554,077, compared to $6,520,756 on December 31, 1996.
During the year ended December 31, 1997, the Company used $6,603,499 in
cash for its operations, compared with $7,560,486 for the year ended December
31, 1996. The decrease in the more recent year was due to lower operating
expenses and higher gross margins, which more than offset higher selling and
administrative expenses. The Company met its cash needs in the year ended
December 31, 1997 from a series of private placements of Common Stock
(approximately $1.5 million in net proceeds, including the $1 million placement
with GI) and Series A Convertible Preferred Stock (approximately $2.0 million in
net proceeds). The Company met its cash needs in the year ended December 31,
1996 from the proceeds of a private placement of Common Stock ($1.9 million in
net proceeds) and of convertible preferred stock issued by its wholly-owned
subsidiary and convertible into shares of the Company ($9.1 million in net
proceeds).
With respect to investing activities in the year ended December 31, 1997,
the Company used cash of $2,895,803, related principally to the purchase of
equipment for a television master control facility in Dallas, Texas and for the
systems development related to the incorporation of Individualized Programming
into the GI cable set-top terminal and to eSchool. During the year ended
December 31, 1996, the Company used cash of $444,189 related to the purchase of
television production equipment and office improvements.
All of the Company's operating subsidiaries have been dependent on
advances from the Company to meet their obligations. The Company's subsidiary,
The Texas Individualized Television
7
<PAGE>
Network, Inc., raised funds directly for its operations in January 1998 and
expects to fund its operations for the foreseeable future from the proceeds of
this financing (see description below). During the year ended December 31, 1997,
the Company advanced approximately $2.6 million to ACTV Net, $3 million to The
Texas Individualized Television Network, Inc., and $2 million to ACTV
Entertainment, Inc. and its other subsidiaries.
Advances are based upon budgeted expenses and revenues for each respective
subsidiary. Adjustments are made during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.
As compared to the Company's balance sheet as of December 31, 1996, the
Company's balance sheet as of December 31, 1997, reflects an increase of
$408,085 in preferred dividends payable, resulting from the issuance of
additional convertible preferred stock during 1997 and the payment of dividends
in kind rather than in cash.
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc.,
(the "Issuer") and The Texas Individualized Television Network, Inc., a
wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note
Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain
private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on
January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas
Network that grants the Purchasers the right to purchase up to 17.5% of the
fully-diluted shares of common stock of Texas Network. The Warrant expires on
June 30, 2003. The Warrant also grants the Purchasers the right, through July
14, 1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity
with the intent to commence operations for a second Regional Network in one of
the ten FOX Sports Net owned and operated regions, the Purchasers have a one
time option to purchase notes from such entity on the same terms and conditions
as the Texas Network financing.
During the first three months of 1998, the Company has raised a total of
$1.4 million from a series of private placements of its Common Stock.
In January 1998, the Company entered into an agreement with certain
holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of
ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement
provides that the Company, at its sole discretion, may purchase from certain
holders of the Preferred Shares up to an aggregate of 150,000 Preferred
8
<PAGE>
Shares based on a predetermined schedule through June 30, 1998. If the Company
chooses to purchase the Preferred Shares, the Company may, at its sole
discretion, pay in cash or a combination of cash, the Company's Common Stock,
and warrants to purchase the Common Stock.
Management of the Company believes that its current funds (taking into
account the approximately $6.4 million raised during the first three months of
1998) will enable the Company to finance its entertainment and corporate
operations at their present level for at least the next twelve months. Such
belief is based on assumptions that could prove to be incorrect, in which case
the Company may require additional capital to finance such operations during
this period. In addition, if the Company is not successful at raising additional
funds, it may be required to significantly reduce its education operations.
While the Company believes that it has adequate funds to launch and operate its
planned Southwest Regional Network, it will need additional funding for Regional
Network expansion. While the Company has engaged an investment bank for
assistance in securing such financing, the Company has no commitments from
lenders or investors at this time and there is no assurance that it will be able
to raise the necessary capital to effect additional Regional Network launches or
to maintain its education operations at current levels. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional financing during this period.
The Company does not have any material contractual commitments for capital
expenditures, although the Company believes that the Southwest Regional Network
may need to acquire approximately $750,000 in equipment for a second master
control facility.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
New Accounting Pronouncements
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.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1998. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No.
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94, Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries. The Company
has not yet determined what effect the adoption of this statement will have on
the financial statements.
10
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed under Item 14 in this report.
PART IV
Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K:
(a)1. FINANCIAL STATEMENTS:
See the Consolidated Financial Statements beginning on Page F-1 hereafter, which
is incorporated by reference.
(a)2. FINANCIAL STATEMENT SCHEDULE
The following Financial Statement Schedule for the years ended December 31, 1997
and December 31, 1996 is filed as part of this Annual Report. The Company had no
activity reportable on this schedule for the year ended December 31, 1995.
Schedule II - Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Column B Column C Column D Column E
---------- ---------------------- ---------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End
Description of Period Expenses Accounts -Describe of Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended 12/31/96:
Accounts receivable
allowance for doubtful
accounts .............. $ 82,746 $ 82,746
Reserve for investment
losses ................ $274,325 $274,325
Year ended 12/31/97:
Accounts receivable
allowance for doubtful
accounts .............. $ 82,746 $ 43,188 $ 82,746 $ 43,188
Reserve for investment
losses ................ $274,325 $274,325 --
</TABLE>
During 1997, the balances of $82,746 for accounts receivable allowance and
$274,325 for investment loss reserve were written off as uncorrectable and
unrecoverable, respectively.
11
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ACTV, Inc.:
We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14 (a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 16, the accompanying 1996 and 1997 consolidated financial
statements have been restated.
Deloitte & Touche LLP
New York, New York
March 18, 1998, (April 17, 1998 as to Note 16)
F-1
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
(as restated (as restated
see Note 16) see Note 16)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 6,520,756 $ 554,077
Accounts receivable-net ....................... 410,193 303,044
Education equipment inventory ................. 337,504 237,757
Other ......................................... 316,962 308,653
------------ ------------
Total current assets ....................... 7,585,415 1,403,531
------------ ------------
Property and equipment-net ....................... 724,089 2,596,785
------------ ------------
Other Assets:
Patents and patents pending ................... 253,779 279,356
Software development costs .................... -- 669,852
Goodwill ...................................... 3,067,560 2,641,188
Other ......................................... 61,781 311,206
------------ ------------
Total other assets ......................... 3,383,120 3,901,602
------------ ------------
Total ................................... $ 11,692,624 $ 7,901,918
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ......... $ 1,594,655 $ 1,882,159
Deferred stock appreciation rights ............ 701,517 --
Preferred dividends payable ................... 195,384 603,469
------------ ------------
Total current liabilities .................. 2,491,556 2,485,628
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, issued and out-
standing none at December 31, 1996,
86,200 at December 31, 1997 ................ -- 8,620
Preferred stock of a subsidiary holding
solely parent company obligations and
convertible into common shares of
the parent, no par value,
436,000 shares authorized: issued and
outstanding 400,000 at December 31,
1996, 316,944 at December 31, 1997 ........ 6,615,664 7,029,708
Common stock, $.10 par value, 35,000,000
shares authorized: issued and outstand-
ing 11,787,106 at December 31, 1996,
14,614,611 at December 31, 1997 ............ 1,178,711 1,461,461
Additional paid-in capital .................... 42,272,205 48,140,596
Notes receivable from stock sales ............. (200,000) (199,900)
Accumulated deficit ........................... (40,665,512) (51,024,195)
------------ ------------
Total shareholders' equity ................. 9,201,068 5,416,290
------------ ------------
Total ................................... $ 11,692,624 $ 7,901,918
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997
(as restated (as restated
see Note 16) see Note 16)
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Revenues ............................ $1,311,130 $1,459,540 $1,650,955
License fees from related party ..... 730 16,789 --
---------- ----------- -----------
Total revenues .................... 1,311,860 1,476,329 $1,650,955
Cost of Sales ....................... 334,136 647,488 471,956
---------- ----------- -----------
Gross profit ...................... 977,724 828,841 1,178,999
Expenses:
Operating expenses .................. 1,260,134 1,955,601 1,360,838
Selling and administrative .......... 4,998,020 6,332,759 6,880,311
Depreciation and amortization ....... 686,906 419,979 327,681
Amortization of goodwill ............ 426,372 426,372 426,372
Loss on investment .................. -- 274,325 --
Stock appreciation rights ........... 567,316 183,634 (346,892)
---------- ----------- -----------
Total expenses .................... 7,938,748 9,592,670 8,648,310
Interest (income) ..................... (138,510) (158,732) (116,870)
Interest expense--related parties ..... 98,392 -- --
---------- ----------- -----------
Interest expense (income) - net ..... (40,118) (158,732) (116,870)
---------- ----------- -----------
Net loss before extraordinary
gain .................................. 6,920,906 8,605,097 7,352,441
Gain on extinguishment of debt ........ 94,117 -- --
---------- ----------- -----------
Net loss .............................. 6,826,789 8,605,097 7,352,441
Preferred stock dividends and
accretions............................. -- 1,695,384 3,006,242
Loss applicable to common stock
shareholders .......................... $6,826,789 $10,300,481 $10,358,683
========== =========== ===========
Basic loss per common share before
extraordinary gain .................... $.68 $.88 $.80
Basic loss per common share after
extraordinary gain .................... $.67 $.88 $.80
Weighted average number of common
shares outstanding .................... 10,162,128 11,739,768 12,883,848
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
-------------------------- ----------------------- Paid-In
------------
Shares Amount Shares Amount Capital Deficit
----------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1, 1995 9,019,550 $ 901,955 $ 26,608,830 $(23,538,242)
Issuance of shares in connection
with financings 1,990,293 199,029 -- -- 8,730,627 --
Issuance of shares in connection
with exercise of stock options 308,247 30,825 -- -- 1,129,924 --
Issuance of shares for services 78,329 7,833 -- -- 217,361 --
Net loss -- -- -- -- -- (6,826,789)
----------- ----------- ------- ---------- ------------ ------------
Balances December 31, 1995 11,396,419 $ 1,139,642 $ 42,686,742 $(30,365,031)
=========== =========== ======= ========== ============ ============
Issuance of shares in connection
with financings 450,000 45,000 400,000 5,115,664 5,832,985
Accretion of subsidiary
preferred stock beneficial feature 1,500,000
Issuance of shares for services 45,687 4,569 109,478
Reversal of option exercise (105,000) (10,500) (357,000)
Net loss (8,605,097)
Preferred stock dividend and
accretion (1,695,384)
----------- ----------- ------- ---------- ------------ ------------
Balances December 31, 1996 (as restated,
see Note 16) 11,787,106 $ 1,178,711 400,000 $6,615,664 $ 42,272,205 $(40,665,512)
=========== =========== ======= ========== ============ ============
Issuance of shares in connection
with financings 733,333 73,333 86,200 8,620 3,447,778
Accretion of subsidiary
preferred stock beneficial feature 2,500,000
Issuance of shares for services 286,511 28,651 414,473
Issuance of shares in connection
with exchange of preferred stock 1,795,661 179,566 (83,056) (2,085,956) 1,994,980
Issuance of shares in connection
with exercise of stock options 12,000 1,200 11,160
Net loss (7,352,441)
Preferred stock dividend and
accretion (3,006,242)
----------- ----------- ------- ---------- ------------ ------------
December 31, 1997 (as restated,
see Note 16) 14,614,611 1,461,461 403,144 7,038,328 48,140,596 $(51,024,195)
=========== =========== ======= ========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common shareholders ......... $(6,826,789) $(10,300,481) $(10,358,683)
----------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ...................... 1,220,873 846,354 754,053
Stock appreciation rights .......................... (183,309) 134,634 (701,517)
Gain on extinguishment of debt obligation .......... (94,717) -- --
Stock issued in lieu of cash compensation .......... 563,430 114,047 443,125
Common stock issued or reserved for
preferred dividends and accretions ................. -- 1,500,000 2,598,156
Loss on investment ................................. -- 274,325 --
Bad debt reserve ................................... -- 82,746 43,188
Changes in assets and liabilities:
Accounts receivable ................................ (150,938) (143,648) 63,960
Education equipment inventory ...................... 34,065 (225,286) 99,747
Other assets ....................................... 80,552 (542,824) (241,117)
Accounts payable and accrued expenses .............. 165,023 504,263 287,504
Preferred stock dividends payable .................. 93,333 195,384 408,085
----------- ------------ ------------
Net cash used in operating
activities ..................................... (5,098,477) (7,560,486) (6,603,499)
----------- ------------ ------------
Cash flows from investing activities:
Investment in patents pending ...................... -- -- (50,000)
Investment in property and equipment ............... (575,323) (444,189) (2,159,576)
Investment in systems .............................. -- -- (686,227)
----------- ------------ ------------
Net cash used in investing activities ................... (575,323) (444,189) (2,895,803)
Cash flows from financing activities:
Proceeds from exercise of warrants
and options ........................................ 122,810 -- 12,360
Proceeds from preferred stock issuances ............ -- 9,115,664 2,045,163
Proceeds from equity financing ..................... 8,951,859 1,877,985 1,475,000
Discounted note prepayment ......................... (101,458) -- --
Note repayment ..................................... (2,247,469) -- 100
----------- ------------ ------------
Net cash provided by financing activities ............... 6,725,742 10,993,649 3,532,623
----------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents ................................... 1,051,942 2,988,974 (5,966,679)
Cash and cash equivalents,
beginning of period ................................ 2,479,840 3,531,782 6,520,756
----------- ------------ ------------
Cash and cash equivalents,
end of period ...................................... 3,531,782 6,520,756 554,077
=========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
Supplemental disclosure of cash flow information: See Note 15
F-5
<PAGE>
ACTV, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization ACTV, Inc. was incorporated July 8, 1983. ACTV, Inc. and its
subsidiaries (the "Company" or "ACTV"), has developed and markets proprietary
technologies for individualized television programming (the "Individualized
Programming") and for Internet learning systems. Individualized Programming
permits a viewer to experience instantly responsive television. Since its
inception, the Company has been engaged in the development of Individualized
Programming, the production of programs that use its Individualized Programming
and the marketing and sales of the various products and services incorporating
the Company's Individualized Programming. In 1997, the Company introduced to the
education market eSchool Online ("eSchool"), a suite of software products that
permit a teacher to use the Internet as an accompanying instructional tool
during a live or pre-recorded video lesson.
Principles of Consolidation - The Company's consolidated financial statements
include the balances of its wholly-owned operating subsidiaries. In
consolidation, all intercompany account balances are eliminated.
Property and Equipment - Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December 31,
1995, 1996 and 1997 aggregated $70,790, $189,957 and $286,883, respectively.
Education Equipment - Education equipment consists of standard personal
computers adapted to provide individualized programming functionality,
videocassette recorders, television monitors and computer printers that the
Company holds in inventory. This inventory is carried on the Company's books at
the lower of first-in, first-out cost or market.
Patents and Patents Pending - The cost of patents, which for patents issued
represents the consideration paid for the assignment of patent rights to the
Company by an employee and for patents pending represents legal costs related
directly to such patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 10
years), which is less than the statutory life of each patent. The balances at
December 31, 1996, and 1997, are net of accumulated amortization of $116,371 and
$141,072, respectively.
Software Development Costs - The Company capitalizes costs incurred for product
software where economic and technological feasibility has been established.
Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the respective products (5 years). The balance at
December 31, 1997, is net of accumulated amortization of $16,376.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition - Sales are primarily recorded as products are shipped and
services are rendered, using the completed contract method of accounting.
Research and Development - Research and development costs, which represent
primarily refinements to Individualized Programming, were $616,455 for the year
ended December 31, 1995, $1,221,362 for the year ended December 31, 1996, and
$551,328 for the year ended December 31, 1997.
Earnings/(Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the period ended
December 31, 1997, which establishes standards for computing and presenting
earnings per share ("EPS") and simplifies the standards for computing EPS
currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings
Per Share"). Common stock equivalents under APB No. 15 are no longer included in
the
F-6
<PAGE>
calculation of primary, or basic, EPS. Loss per common share equals net loss
divided by the weighted average number of shares of the Company's common stock
("Common Stock") outstanding during the period. The Company did not consider the
effect of stock options or convertible preferred stock upon the calculation of
the loss per common share, as it would be anti-dilutive.
Reclassifications - Certain reclassifications have been made in the December 31,
1995, and 1996, financial statements to conform to the December 31, 1997,
presentation.
Intangibles - The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is being amortized on a straight-line
basis over a period of 10 years. On a quarterly basis, the Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business. Impairments, if any, will be recognized through a charge to
operation in the period in which the impairment is deemed to exist. Based on
such analysis, the Company does not believe that goodwill has been impaired.
Other Current Assets - The Company's consolidated balance sheets at December 31,
1996 and December 31, 1997 reflect balances of $343,962 and $224,712,
respectively, related to cash advances made to executive officers.
New Accounting Pronouncements
- -----------------------------
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.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1998. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.
2. NATURE OF OPERATIONS
The principal markets for the Company's products are in-home entertainment and
education within the United States. The Company plans to sell individualized
entertainment programming (initially professional and college sports
programming) to the end user through cable television systems on a subscription
basis. The Company sells eSchool and individualized distance learning
programming and related hardware to schools, colleges, and private education
networks. No single client accounted for more than 10% of the Company's revenues
during the year ended December 31, 1997, except for Georgia Public Television,
which accounted for approximately 17% and 24% of total revenues in 1996 and
1997, respectively and the Texas Workforce Commission, which accounted for 24%
of total revenues in 1997. During 1996, the Company generated no revenues from
the Texas Workforce Commission.
3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS
F-7
<PAGE>
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net at December 31, 1996, and 1997, consisted of the
following (at cost):
1996 1997
-------- ---------
Machinery and equipment $636,845 2,931,682
Office furniture and fixtures 357,373 501,435
-------- ---------
Total 994,218 3,433,117
Less accumulated depreciation 270,129 836,332
-------- ---------
Total $724,089 2,596,785
======== =========
5. EXTRAORDINARY ITEM
During 1995, the Company realized an extraordinary gain of $94,117 related to
the repayment of an obligation to a former affiliate of the Company at an amount
below the value of which such obligation was carried on the books of the
Company.
6. FINANCING ACTIVITIES
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the
"Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned
subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase
Agreement, dated as of January 13, 1998 (the "Agreement") with certain private
investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on January
14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that
grants the Purchasers the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network. The Warrant expires on June 30, 2003.
The Warrant also grants the Purchasers the right, through July 14, 1999, to
exchange the Warrant for such number of shares of the Company's Common Stock, at
the time of and giving effect to such exchange, equal to 5.5% of the fully
diluted number of shares of Common Stock outstanding, after giving effect to the
exercise or conversion of all then outstanding options, warrants and other
rights to purchase or acquire shares of Common Stock. After five years from the
date of issuance, the Purchasers have the right to put the warrants to the Texas
Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity with
the intent to commence operations for a second Regional Network in one of the
ten FOX Sports Net owned and operated regions, the Purchasers have a one time
option to purchase notes from such entity on the same terms and conditions as
the Texas Network financing.
During the first three months of 1998, the Company has raised a total of $1.4
million from a series of private placements of its Common Stock.
F-8
<PAGE>
During 1997, the Company raised approximately $3.5 million from the proceeds of
a series of private placements of Common Stock (approximately $1.5 million in
net proceeds) and Series A Convertible Preferred Stock (approximately $2.0
million in net proceeds).
During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned subsidiary and convertible into shares of the Company ($9.1
million in net proceeds). The Convertible Preferred Stock is convertible into
Common Stock of ACTV, Inc., beginning January 1, 1997, at varying discounts to
the market price of Common Stock. After September 1, 1997, holders of the
Convertible Preferred Stock have been able to use the lesser of (i) the then
current market price of the Company's Common Stock, or (ii) an average market
price during the month of August 1997 as the price to which the discount is
applied for conversions. In addition, the Company has the right to redeem the
Convertible Preferred Stock at a price equal to $25 times the number of shares
being purchased, plus accrued and unpaid dividends (the "Redemption Price").
This right may be exercised by the Company only if the closing price of the
Company's Common Stock is above $9.00 for thirty consecutive trading days prior
to redemption. The Company believes that it is highly likely that the holders of
the 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.
The Convertible Preferred Stock is convertible into shares of common stock at a
discounted conversion price. The discount ranged from 14% to a maximum of
30.375%. The extent of the beneficial conversion feature was approximately $4.0
million, representing the maximum difference between the discounted conversion
price and the prevailing market price of the Common Stock. Preferred stock
accretions of $1.5 million and $2.5 million, respectively, were recorded for the
years ended December 31, 1996 and 1997.
Management of the Company believes that its current funds (taking into account
the approximately $6.4 million raised during the first three months of 1998)
will enable the Company to finance its entertainment and corporate operations at
their present level for at least the next twelve months. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional capital to finance such operations during this period. In
addition, if the Company is not successful at raising additional funds, it may
be required to significantly reduce its education operations. While the Company
believes that it has adequate funds to launch and operate its planned Southwest
Regional Network, it will need additional funding for Regional Network
expansion. While the Company has engaged an investment bank for assistance in
securing such financing, the Company has no commitments from lenders or
investors at this time and there is no assurance that it will be able to raise
the necessary capital to effect additional Regional Network launches or to
maintain its education operations at current levels.
7. SHAREHOLDERS' EQUITY
At December 31, 1997, the Company had reserved shares of Common Stock for
issuance as follows:
1989 Qualified Stock Option Plan 49,567
1989 Non-Qualified Stock Option Plan 47,250
1996 Qualified Stock Option Plan 380,000
Options granted outside of formal plans 3,062,401
---------
Total 3,539,218
=========
Convertible Preferred Stock At December 31, 1997, the Company was authorized to
issue 1,000,000 shares of blank check Preferred Stock, par value $0.10 per
share, of which 120,00 shares have been designated Series A Convertible
Preferred Stock. At December 31, 1997, 86,200 shares of Series A Convertible
Preferred Stock were issued and outstanding. Dividends, which are payable in
cash or in kind, are payable semi-annually at a rate of 7% per annum.
F-9
<PAGE>
Exchangeable Preferred Stock At December 31, 1997, the Company's wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
Convertible Preferred Stock, no par value, of which 316,944 shares were issued
and outstanding. Dividends, which are payable in cash or in kind, compound
quarterly and are payable semi-annually at a rate of 5% per annum.
8. STOCK OPTIONS
During 1989, the Board of Directors approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000 options to purchase Common Stock to key employees. The Employee Plan
stipulates that the option price be not less than fair market value on the date
of grant. Options granted will have an expiration date not to exceed ten years
from the date of grant. At December 31, 1997, 97,500 options had been granted
under this plan, of which 19,000 had been exercised and 28,933 had expired or
been canceled.
In addition, in August 1989, the Board of Directors approved a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee appointed by the Board. The Non-Qualified Plan provides for the
granting of up to 100,000 options to purchase shares of Common Stock to
employees, officers, directors, consultants and independent contractors. The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant, or such other price as the Board may determine.
Options granted under this Plan shall expire on a date determined by the
committee but in no event later than three months after the termination of
employment or retainer. At December 31, 1997, 97,000 options had been granted
under this plan, of which 22,250 had been exercised and 27,500 had expired or
been canceled.
During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1996 Option Plan, the Company is authorized to issue options for a total of
500,000 shares of Common Stock. As of December 31, 1997, the Company had issued
430,000 options under the plan, of which none had been exercised and 50,000 had
been canceled.
At December 31, 1997, the Company also had outstanding options that were issued
to Directors, certain employees and consultants for the purchase of 3,062,401
shares of Common Stock that were not issued pursuant to a formal plan. The
prices of these options range from $1.50 to $5.50 per share; they have
expiration dates in the years 1998 through 2003. The options granted are not
part of the Employee Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan discussed above.
A summary of the status of the Company's stock options as of December 31, 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1997 Exer 1996 Exer 1995 Exer
Shares Price Shares Price Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 3,328,718 2,747,082
Options granted 339,683 $1.91 887,500 $3.73 1,706,087 $3.41
Options exercised 17,000 $0.73 -- -- 141,833 $2.33
Options terminated 112,183 $4.06 305,864 $3.76 422,276 $5.27
Outstanding at end
of period 3,539,218 $1.81 3,328,718 $2.99 2,747,082 $3.27
Options exercisable
at end of period 2,363,134 $1.87 1,719,134 $3.19 1,091,083 $3.04
</TABLE>
F-10
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Weighted
Outstanding Remaining Average Number Average
Range of at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0 to 1.50 2,822,718 5.0 Years $1.50 1,757,053 $1.50
1.51 to 3.50 474,000 1.7 Years $2.52 446,915 $2.52
3.51 to 5.50 242,500 1.7 Years $4.05 159,166 $4.18
</TABLE>
The weighted average fair value of options granted during 1996 and 1997 was
$1.21 and $.64 per share, respectively, excluding the value of options granted
and terminated within the year. In the case of each issuance, options were
issued at an exercise price that was higher than the fair market value of the
Company's Common Stock on the date of grant. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for option issuances. Had compensation cost for the Company's option
issuances been determined based on the fair value at the grant dates consistent
with the method of FASB Statement 123, the Company's net loss and loss per share
for the years ended December 31, 1995, 1996 and 1997 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Loss to common shareholders 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
As reported $6,826,789 $10,300,481 $10,358,683
Pro forma $9,506,556 $11,185,735 $10,574,807
Net loss per common share 1995 1996 1997
---- ---- ----
As reported $0.67 $0.88 $0.80
Pro forma $0.94 $0.95 $0.82
</TABLE>
The Company estimated the fair value of options issued during 1995, 1996 and
1997 on the date of each grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend yield, expected
volatility for 1995 and 1996 of 61.5%, expected volatility for 1997 of 57.3%,
and a risk free interest rate of 6% for all years.
Certain employees, including the executive officers Samuels, Reese, Crowley and
Cline, have been granted options to purchase Class B Common Stock, at fair value
as of the date of grant, of certain of the Company's subsidiaries; such common
stock, if issued, will have majority voting rights in such subsidiaries.
9. STOCK APPRECIATION RIGHTS PLANS
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. Subject to adjustment
as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided, however, that at no time shall there be more than
an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards may be made.
F-11
<PAGE>
Both the 1992 and 1996 SAR Plans are administered by the Stock Appreciation
Rights Committee (the "SAR Committee").
SARs may not be exercised until the six months from the date of grant. SARs
issued pursuant to the 1992 SAR Plan vest in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest either in a lump sum or in such installments, which need not be
equal, as the Committee shall determine. If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic relations order as defined in the Internal Revenue Code
of 1986, as amended.
Upon exercise of a SAR, the holder will receive for each share for which a SAR
is exercised, as determined by the SAR Committee in its discretion, (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common Stock, equal to the difference between (i) the fair market value per
share of the Common Stock on the date of exercise of the SAR and (ii) the value
of a SAR, which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.
Under the Company's 1992 SAR Plan, as of December 31, 1997, the Company has
granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to
ten employees. The SARs expire between 2001 and 2006. Under the Company's 1996
SAR Plan, as of December 31, 1997, the Company has granted 380,000 outstanding
SARs (with an exercise price of $1.50 per share) to six employees. The SARs
expire between 2002 and 2006. During 1997, a total of 203,000 SARs were
exercised under both plans.
10. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Deferred income taxes reflect the net tax effects at an effective tax rate of
35.33% of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1996, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 13,365,772 $ 16,131,213
Differences between book and tax basis of property 34,019 56,148
------------ ------------
13,399,791 16,187,361
Deferred tax liabilities:
Differences between book and tax basis of property (106,819) (181,104)
------------ ------------
13,292,972 16,000,257
Valuation Allowance (13,292,972) (16,000,257)
------------ ------------
Net deferred tax asset $ 0 $ 0
============ ============
</TABLE>
The increase in the valuation allowance for the year ended December 31, 1996 and
1997, was approximately $3.3 million and $2.7 million respectively. There was no
provision or benefit for federal income taxes as a result of the net operating
loss in the current year.
F-12
<PAGE>
At December 31, 1997, the Company has Federal net operating loss carryovers of
approximately $45.7 million. These carryovers may be subject to certain
limitations and will expire between the years 1998 and 2012.
11. COMMITMENTS
At December 31, 1997, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $980,000. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1995, 1996 and 1997 aggregated $176,264, $129,600, and
$330,430 respectively. The Company has employment agreements with certain key
employees. These agreements extend for a period of a maximum of five years and
contain non-competition provisions which extend two years after termination of
employment with the Company. At December 31, 1997, the Company is committed to
expend a total of approximately $2.7 million under these agreements.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables.
The Company attempts to mitigate cash investment risks by placing such
investments in insured depository accounts and with financial institutions that
have high credit ratings. Concentrations of risk with respect to trade
receivables exist because of the relatively few companies or other organizations
(primarily educational or government bodies) with which the Company currently
does business. The Company attempts to limit these risks by closely monitoring
the credit of those to whom it is contemplating providing its products, and
continuing such credit monitoring activities and other collection activities
throughout the payment period. In certain instances, the Company further
minimizes concentrations of credit risks by requiring partial advance payments
for the products provided.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accruals, the carrying amounts approximated fair
value because of their short maturity.
14. INVESTMENT AND ADJUSTMENTS
In January 1995, the Company invested $274,325 in the common stock
(approximately 15% of ownership interest) of a company (the "Licensee"), which
had licensed the Company's Individualized Programming for commercialization in
special-purpose theaters.
The Company also performed executive production services for the Licensee on a
fee basis. During 1996, the Company recorded license fee and production service
revenue from the Licensee of $16,789 and $199,666, respectively. At December 31,
1996, the Company had unpaid receivables pursuant to such revenues of $82,746.
During 1997, the Licensee filed for liquidation under United States Bankruptcy
laws. In anticipation of such filing, at December 31, 1996 the Company provided
a reserve for the full amount of the receivables outstanding of $82,746 and a
valuation allowance for its full investment in the Licensee of $274,325.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended December 31, 1995, the Company made non-recourse loans to
certain employees to purchase the Company's common stock by exercising options.
The consolidated balance sheet at December 31, 1996, reflects non-cash activity
during the year ended December 31, 1996, that relates to a reversal of certain
of these option exercises and resulting non-recourse loan transactions: a
decrease in notes receivable from stock sales and a decrease in common stock and
additional paid-in capital of $367,500.
The Company made no cash payments of interest or income taxes during the years
ended December 31, 1996 and 1997.
16. RESTATMENT
F-13
<PAGE>
Subsequent to the issuance of the 1996 and 1997 financial statements, management
determined that the Company's consolidated financial statements for the years
ended December 31, 1996 and 1997, should be restated to conform with the
Financial Accounting Standards Board's Emerging Issues Task Force - Topic D60
["Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature"] issued March 13, 1997, which formally
announced the SEC staff's position that any discounts resulting from an
allocation of proceeds to the beneficial conversion feature is analogous to a
dividend and should be recognized as a return to the preferred shareholders over
the minimum conversion period. As a result of this restatement, loss applicable
to common shareholders increased by $1,500,000 ($.13 per share) and $2,500,000
($.19 per share), respectively, for the years ended December 31, 1996 and 1997.
Revenues, expenses, net loss, total assets and total shareholders' equity are
not affected by this restatement.
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of New York
and State of New York on the 16th day of April 1998.
ACTV, Inc.
By: /s/ William C. Samuels
------------------------------------
William C. Samuels
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
Signature Title Date
/s/ William C. Samuels Chairman of the Board, Chief April 16, 1998
- ------------------------ Executive Officer, President and
William C. Samuels Director
/s/ David Reese Executive Vice President, President - April 16, 1998
- ------------------------ ACTV Entertainment, Inc., and
David Reese Director
/s/ Bruce Crowley Executive Vice President, President - April 16, 1998
- ------------------------ ACTV Net Inc., and Director
Bruce Crowley
/s/ Christopher C. Cline Senior Vice President, Chief April 16, 1998
- ------------------------ Financial Officer and Secretary
Christopher C. Cline
/s/ William Frank Director April 16, 1998
- ------------------------
William A. Frank
/s/ Richard Hyman Director April 16, 1998
- ------------------------
Richard Hyman
/s/ Jess Ravich Director April 16, 1998
- ------------------------
Jess Ravich
/s/ Steven W. Schuster Director April 16, 1998
- ------------------------
Steven W. Schuster
